4 Deal-Bait Stocks for Big Tech Names to Snap Up - Barron's
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Small companies have been on a tear, up 16% since Nov. 3, as investors have turned away from big, cash-rich dividend payers in search of smaller companies with higher growth prospects. Investors aren’t the only buyers interested in small growth companies—there’s a renewed interest among big technology companies that are falling behind in innovation.
So what stocks look like potential takeover targets?
Among the first stops for big tech outfits are three promising young equipment vendors that have come public in the last two years:
Pure Storage
PSTG 0.42283298097251587%
Pure Storage Inc. Cl A
U.S.: NYSE
USD14.25
0.06
0.42283298097251587%
/Date(1480100523514-0600)/
Volume (Delayed 15m)
:
217096
AFTER HOURS
USD14.25
%
Volume (Delayed 15m)
:
853
P/E Ratio
N/A
Market Cap
2801675634.08826
Dividend Yield
N/A
Rev. per Employee
449812
More quote details and news »
(ticker: PSTG),
Nimble Storage
NMBL -0.5148005148005148%
Nimble Storage Inc.
U.S.: NYSE
USD7.73
-0.04
-0.5148005148005148%
/Date(1480100523418-0600)/
Volume (Delayed 15m)
:
1257225
AFTER HOURS
USD7.6624
-0.0676
-0.8745148771021992%
Volume (Delayed 15m)
:
693
P/E Ratio
N/A
Market Cap
657822989.82811
Dividend Yield
N/A
Rev. per Employee
340272
More quote details and news »
(NMBL), and
Nutanix
NTNX -0.38089657193085263%
Nutanix Inc. Cl A
U.S.: Nasdaq
USD34
-0.13
-0.38089657193085263%
/Date(1480100400381-0600)/
Volume (Delayed 15m)
:
528714
AFTER HOURS
USD34
%
Volume (Delayed 15m)
:
2044
P/E Ratio
N/A
Market Cap
4667287504.10901
Dividend Yield
N/A
Rev. per Employee
224711
More quote details and news »
(NTNX). These companies all operate in the biggest growth areas of the data storage market: They use flash memory chips instead of spinning disk drives.
Nutanix also has a hand in the networking and server-computer corners of information technology. Combining those two businesses with storage gives Nutanix a way to sell all of the parts that a company requires to build out its central data-processing needs.
Potential buyers for the three include two of the biggest enterprise suppliers,
Hewlett Packard Enterprise (HPE)
HPE -1.4012738853503184%
Hewlett Packard Enterprise Co.
U.S.: NYSE
USD23.22
-0.33
-1.4012738853503184%
/Date(1480100455784-0600)/
Volume (Delayed 15m)
:
10553686
AFTER HOURS
USD23.0688
-0.1512
-0.6511627906976745%
Volume (Delayed 15m)
:
94097
P/E Ratio
12.688524590163935
Market Cap
38684518856.0486
Dividend Yield
1.119724375538329%
Rev. per Employee
208846
More quote details and news »
and
Cisco Systems
CSCO 1.2790306294177045%
Cisco Systems Inc.
U.S.: Nasdaq
USD30.09
0.38
1.2790306294177045%
/Date(1480111152214-0600)/
Volume (Delayed 15m)
:
14933230
AFTER HOURS
USD29.95
-0.14
-0.4652708541043536%
Volume (Delayed 15m)
:
2745632
P/E Ratio
14.32857142857143
Market Cap
151044542728.845
Dividend Yield
3.456297773346627%
Rev. per Employee
663731
More quote details and news »
(CSCO).
THE CASE FOR BUYING, from a technology standpoint, is twofold. For one, Hewlett and Cisco are struggling for growth. In general, developing innovative technology is a lot better than buying other companies, given all the risks that mergers and acquisitions bring and the checkered history of M&A in technology. But these companies’ own internal efforts haven’t quite cut it. Better, perhaps, to go after some proven public names.
Second, both the giants and the small fry are in the same pickle: Cloud computing is taking over IT. What that means, as this magazine has relentlessly argued for three years running, is that
Amazon.com
AMZN 0.032046351843306155%
Amazon.com Inc.
U.S.: Nasdaq
USD780.37
0.25
0.032046351843306155%
/Date(1480111198558-0600)/
Volume (Delayed 15m)
:
1799340
AFTER HOURS
USD780.21
-0.16
-0.020503094685854147%
Volume (Delayed 15m)
:
37728
P/E Ratio
178.8075980111358
Market Cap
370806063373.208
Dividend Yield
N/A
Rev. per Employee
554562
More quote details and news »
(AMZN),
Microsoft
MSFT 0.2152317880794702%
Microsoft Corp.
U.S.: Nasdaq
USD60.53
0.13
0.2152317880794702%
/Date(1480111187603-0600)/
Volume (Delayed 15m)
:
7947353
AFTER HOURS
USD60.5
-0.03
-0.04956220056170494%
Volume (Delayed 15m)
:
462263
P/E Ratio
29.10096153846154
Market Cap
470641991031.066
Dividend Yield
2.577234429208657%
Rev. per Employee
745325
More quote details and news »
(MSFT) and
Alphabet
GOOGL 0.15789473684210525%
Alphabet Inc. Cl A
U.S.: Nasdaq
USD780.23
1.23
0.15789473684210525%
/Date(1480111170384-0600)/
Volume (Delayed 15m)
:
593047
AFTER HOURS
USD779
-1.23
-0.1576458223857068%
Volume (Delayed 15m)
:
20258
P/E Ratio
28.550884267611252
Market Cap
530193427648.262
Dividend Yield
N/A
Rev. per Employee
1378090
More quote details and news »
’s (GOOGL) Google are increasingly the dominant IT buyers. Big companies have reduced their IT purchases, starving Cisco and Hewlett of traditional streams of revenue, but also imperiling the pricing power of the smaller companies that must try and sell to just a few large buyers.
Hewlett, one-half of the former
HP
HPQ 2.0847343644922662%
HP Inc.
U.S.: NYSE
USD15.18
0.31
2.0847343644922662%
/Date(1480100462748-0600)/
Volume (Delayed 15m)
:
8603814
AFTER HOURS
USD15.1
-0.08
-0.5270092226613966%
Volume (Delayed 15m)
:
271370
P/E Ratio
10.690140845070422
Market Cap
25971097846.3367
Dividend Yield
3.496706192358366%
Rev. per Employee
168077
More quote details and news »
and run by Meg Whitman, last week turned in a 7% drop in sales year over year for the three months ended in October. The company is spinning off two big chunks of its revenue, its enterprise services unit and its software unit, which together made up 45% of sales last quarter. Even after backing out those divestitures, an estimate provided by Morgan Stanley analyst Katy Huberty has next year’s revenue declining 1.8% for the remaining businesses, before growing ever so slightly in the fiscal year ending October 2018.
EVEN THAT MAY BE TOO OPTIMISTIC. All of Hewlett’s main lines of business, the stuff that the firm is keeping, declined last quarter. That includes three key categories: storage, servers, and networking, which all saw declines for the second quarter in a row. Moreover, while some of those products have struggled in any given quarter, networking has been a bright spot up until now. Last quarter it was down 34%.
Hewlett’s Whitman says that once clear of the divestitures, the company will have a cleaner, clearer mandate and will be able to take on a lot of new partnerships and move more stuff. Perhaps, but it’s more likely that all the companies Hewlett and Cisco have bought, and all the research and development they’ve done, just hasn’t added up to technology offerings that are really leading-edge, as they claim.
One observer, Shebly Seyrafi at FBM Securities, who has the equivalent of a Buy rating on HP, wrote after the results that he expects the company’s forthcoming line of products will pick up the pace in areas, such as server computers, where it was weak.
Rather than hope for those home-grown efforts, HP could just buy one of the three challengers with established growth. Nimble is projected to have revenue of half a billion dollars next fiscal year, and Pure and Nutanix are each expected to have $1 billion or more. And those are companies growing at double digits.
That sounds a lot better for HP than starting from scratch with its own efforts.
CISCO HAS ITS OWN PROBLEMS. Sales of its two main product categories, switching and routing, which make up 47% of total revenue, are stagnating. Switching, a $15 billion annual business, was down 7% from the year prior in the latest quarter, and down 1.4% from its level two years ago. Routing was up 6% year over year, but is also below its sales level two years ago.
Cisco’s chief, Chuck Robbins, has cited issues such as macroeconomic weakness as holding back some purchases by enterprises, but not everyone on the Street believes his explanation.
A look through Cisco’s quarterly filing with the Securities and Exchange Commission reveals, wrote J.P. Morgan analyst Rod Hall last week, that Cisco’s switching business saw declines in areas other than the products Cisco discussed. Cisco sales are expected to decline 1.8% this fiscal year ending in July before rising perhaps 2.4% in 2018.
A purchase of Nimble, Pure, or Nutanix, mind you, would not be a small thing, but it should be manageable. Nutanix has a $4.7 billion market value, or roughly seven times projected revenue, and is not going to be profitable anytime soon. At $2.8 billion, Pure is less of a stretch, though it’s also losing money. At $656 million, Nimble wouldn’t cause either Hewlett or Cisco any grief, even with a premium from today’s price, though it too is losing money fast.
THESE THREE STORAGE COMPANIES offer the best thematic argument for an acquisition in tech. But there are a number of other companies with market values of $8 billion or less that have significant momentum and should be considered attractive.
For instance,
Splunk
SPLK 1.1795316565481353%
Splunk Inc.
U.S.: Nasdaq
USD58.33
0.68
1.1795316565481353%
/Date(1480111142846-0600)/
Volume (Delayed 15m)
:
551701
AFTER HOURS
USD58.61
0.28
0.48002743013886506%
Volume (Delayed 15m)
:
16310
P/E Ratio
N/A
Market Cap
7847893393.63342
Dividend Yield
N/A
Rev. per Employee
377690
More quote details and news »
(SPLK), which helps companies sort and sift large amounts of data. It’s approaching $1 billion in revenue and growing at almost 40% as it does. It’s easy to imagine
IBM
IBM 0.7161377947894801%
International Business Machines Corp.
U.S.: NYSE
USD163.14
1.16
0.7161377947894801%
/Date(1480111187448-0600)/
Volume (Delayed 15m)
:
1563080
AFTER HOURS
USD163.5
0.36
0.2206693637366679%
Volume (Delayed 15m)
:
41425
P/E Ratio
13.29541009258052
Market Cap
155122480933.316
Dividend Yield
3.432634547014834%
Rev. per Employee
212324
More quote details and news »
(IBM) or
Salesforce.com
CRM -0.29749830966869506%
Salesforce.com Inc.
U.S.: NYSE
USD73.73
-0.22
-0.29749830966869506%
/Date(1480111142205-0600)/
Volume (Delayed 15m)
:
2322993
AFTER HOURS
USD73.45
-0.28
-0.37976400379764%
Volume (Delayed 15m)
:
23508
P/E Ratio
245.76666666666668
Market Cap
50069602467.6617
Dividend Yield
N/A
Rev. per Employee
416179
More quote details and news »
(CRM) making a bid for them.
Likewise,
Veeva Systems
VEEV -0.04320587599913588%
Veeva Systems Inc. Cl A
U.S.: NYSE
USD46.27
-0.02
-0.04320587599913588%
/Date(1480100523610-0600)/
Volume (Delayed 15m)
:
1310533
AFTER HOURS
USD46.45
0.18
0.38902096390749946%
Volume (Delayed 15m)
:
3169
P/E Ratio
102.82222222222222
Market Cap
6301494625.6387
Dividend Yield
N/A
Rev. per Employee
344749
More quote details and news »
(VEEV) is a $6.3 billion cloud-computing software vendor whose focus is on global life-sciences companies. It helps them to manage documents and business processes. The company’s annual revenue is almost half a billion dollars, growing at over 30%, and it is solidly profitable. It’s on something of a roll, having beaten sales estimates by a wide margin for six quarters in a row. Again, it’s possible to see Salesforce,
Oracle
ORCL 0.4239401496259352%
Oracle Corp.
U.S.: NYSE
USD40.27
0.17
0.4239401496259352%
/Date(1480111167678-0600)/
Volume (Delayed 15m)
:
3885384
AFTER HOURS
USD40.2
-0.07
-0.17382666997765087%
Volume (Delayed 15m)
:
127731
P/E Ratio
19.176190476190477
Market Cap
165334326815.939
Dividend Yield
1.4899428855227217%
Rev. per Employee
273485
More quote details and news »
(ORCL), or
SAP
SAP.XE 1.7470881863560732%
SAP SE ADR
U.S.: NYSE
USD85.61
1.47
1.7470881863560732%
/Date(1480100523397-0600)/
Volume (Delayed 15m)
:
656223
AFTER HOURS
USD85.6088
-0.0012
-0.0014017054082467002%
Volume (Delayed 15m)
:
1849
P/E Ratio
27.32001531784529
Market Cap
105354793522.116
Dividend Yield
1.530408830744072%
Rev. per Employee
311431
More quote details and news »
(SAP) finding it attractive.
OTHER SMALL COMPANIES with a solid franchise that could be worth a look for an established tech firm are
Atlassian
TEAM 0.036483035388544326%
Atlassian Corp. PLC Cl A
U.S.: Nasdaq
USD27.42
0.01
0.036483035388544326%
/Date(1480100400341-0600)/
Volume (Delayed 15m)
:
218842
AFTER HOURS
USD27.4303
0.0103
0.03756382202771699%
Volume (Delayed 15m)
:
502
P/E Ratio
N/A
Market Cap
6037307149.81757
Dividend Yield
N/A
Rev. per Employee
279559
More quote details and news »
(TEAM), on track for $600 million in sales of software that facilitates collaboration of technology help desks. However, of more interest may be
ServiceNow
NOW 0.7926479035037335%
ServiceNow Inc.
U.S.: NYSE
USD87.74
0.69
0.7926479035037335%
/Date(1480100493008-0600)/
Volume (Delayed 15m)
:
707011
AFTER HOURS
USD87.74
%
Volume (Delayed 15m)
:
11814
P/E Ratio
N/A
Market Cap
14565804924.5981
Dividend Yield
N/A
Rev. per Employee
350108
More quote details and news »
(NOW), which moves those IT help desks into a cloud-computing environment. The same usual suspects listed above, groping for growth, might be interested.
Other young companies that have come public in recent years may at some point be worth a look, but at the moment, their annual revenue, in the range of $100 million to $300 million, means they’ve yet to fully prove themselves.
They include
Box
BOX -0.8403361344537815%
Box Inc. Cl A
U.S.: NYSE
USD15.34
-0.13
-0.8403361344537815%
/Date(1480100463513-0600)/
Volume (Delayed 15m)
:
244965
AFTER HOURS
USD15.34
%
Volume (Delayed 15m)
:
608
P/E Ratio
N/A
Market Cap
1959957384.47279
Dividend Yield
N/A
Rev. per Employee
255110
More quote details and news »
(BOX), a maker of enterprise collaboration tools;
Rapid7
RPD 0.8389261744966443%
Rapid7 Inc.
U.S.: Nasdaq
USD12.02
0.1
0.8389261744966443%
/Date(1480100400277-0600)/
Volume (Delayed 15m)
:
214307
AFTER HOURS
USD12.02
%
Volume (Delayed 15m)
:
249
P/E Ratio
N/A
Market Cap
510801920.011596
Dividend Yield
N/A
Rev. per Employee
192138
More quote details and news »
(RPD), the security technology vendor;
Twilio
TWLO -1.7096412556053813%
Twilio Inc. Cl A
U.S.: NYSE
USD35.07
-0.61
-1.7096412556053813%
/Date(1480111130657-0600)/
Volume (Delayed 15m)
:
1531998
AFTER HOURS
USD35.03
-0.04
-0.11405759908753921%
Volume (Delayed 15m)
:
11269
P/E Ratio
N/A
Market Cap
3055609263.60912
Dividend Yield
N/A
Rev. per Employee
N/A
More quote details and news »
(TWLO), a maker of mobile apps for the likes of Uber;
BlackLine
BL -0.482017055988135%
BlackLine Inc.
U.S.: Nasdaq
USD26.84
-0.13
-0.482017055988135%
/Date(1480100400225-0600)/
Volume (Delayed 15m)
:
81994
P/E Ratio
N/A
Market Cap
1324044081.92917
Dividend Yield
N/A
Rev. per Employee
N/A
More quote details and news »
(BL), a maker of financial apps; and
Impinj
PI -0.6944444444444444%
Impinj Inc.
U.S.: Nasdaq
USD28.6
-0.2
-0.6944444444444444%
/Date(1480100400303-0600)/
Volume (Delayed 15m)
:
217102
AFTER HOURS
USD28.57
-0.03
-0.1048951048951049%
Volume (Delayed 15m)
:
P/E Ratio
N/A
Market Cap
536993580.541992
Dividend Yield
N/A
Rev. per Employee
N/A
More quote details and news »
(PI), which develops sensors and software for the Internet of Things.
The punchline to all this buying is that it may not help companies such as Hewlett or Cisco or Oracle really juice their growth efforts. Deals can only go so far if a company isn’t fundamentally innovating. Healthy R&D is the better route.
But in a market where large deals such as Microsoft’s $26 billion offer to buy
LinkedIn
LNKD 0.1179971270264724%
LinkedIn Corp. Cl A
U.S.: NYSE
USD195.15
0.23
0.1179971270264724%
/Date(1480100450865-0600)/
Volume (Delayed 15m)
:
425351
AFTER HOURS
USD195.05
-0.1
-0.05124263387138099%
Volume (Delayed 15m)
:
P/E Ratio
N/A
Market Cap
26450451851.4686
Dividend Yield
N/A
Rev. per Employee
384507
More quote details and news »
(LNKD) are currently in vogue, there’s absolutely nothing wrong with being willing to sell out when the opportunity knocks.
TIERNAN RAY can be reached at: tiernan.ray@barrons.com, www.blogs.barrons.com/techtraderdaily or www.twitter.com/barronstechblog
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