The proliferation of the cloud continues to be one of the most amazing stories in the ever-expanding world of technology. Since the introduction of the smartphone in 2007, just a short 10 years ago, the demand for data for both streaming and downloads has exploded. Toss in massive new Internet of Things applications, big data use, a huge directional change in media and entertainment, and a multitude of additional structural uses, and the growth just keep exponentially going higher.
While cloud growth continues almost unabated, so does spending for maintenance and expansion. A new RBC research report traces closed expenditures, and they continue at a furious pace. They report noted:
Cloud service provider capital expenditures grew ~23% year over year in the third quarter and increased 24% quarter over quarter in our tracker, while the fourth quarter is expected to be stable seasonally, and grow +19% year over year with notable acceleration at Facebook Inc. (NASDAQ: FB) and Microsoft Inc. (NASDAQ: MSFT). Most of the large hyperscale vendors saw capex trend up year over year in the September quarter. Wall Street estimates project that our Cloud constituents could spend $61.4 billion in 2017 in capex, up 17% year over year from $52.4 billion in 2016(versus 17% growth in 2016).
The analysts point out that the companies that look to benefit the most from this huge spending are the hard disk drive and select semiconductor companies. They highlighted five that they feel offer lower risk and could be big beneficiaries.
This company has been on fire over the past year and remains the top pick at RBC and across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
Surprisingly, the stock remains underowned compared to peers, and the 40% iPhone content growth, combined with huge cloud growth, are big factors in pushing shares higher. RBC noted this in its report:
Broadcom has exposure to the cloud through their Enterprise Storage segment (HDD controllers) and general data center buildouts in their Wired Infrastructure segment. Within Hard Disk Drives, enterprise units are 15-20% of the business on a unit basis and 20-30% on a revenue/profit basis. We estimate cloud/hyperscale build outs contribute to 65% of the segment. Cloud and hyperscale spending is probably the fastest growing sub segments within the enterprise businesses of the HDD manufacturers.
Broadcom investors receive a 1.63% dividend. The RBC price target for the stock is $300, and the Wall Street consensus target is $291.64. Shares closed Monday at $265.01.
This leader in semiconductors is working hard to scale away from dependence on personal computers, and the Internet of Things is a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.
The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.
Intel also destroyed estimates and raised its full-year outlook when the company reported quarterly earnings that easily topped analysts’ expectations last week. The company reported adjusted earnings per share of $1.01, while overall revenue was pegged at $16.15 billion. Client computing revenue totaled $8.86 billion, and Data Center revenue was $4.88 billion.
Intel investors receive a 2.4% dividend. RBC rates the shares at Sector Perform with a price target of $44.The consensus price objective is $44.74. Shares closed Monday at $45.75.