In a recent report, Nomura highlighted that webscale spending growth is accelerating in the U.S. As a result, Nomura has picked some companies that it sees benefiting the most from the growth in webscale spending this year, and even into 2020.
Overall, webscale spending has risen from -5% in the first quarter to 20% in the third quarter, although this missed the consensus estimate of 31% growth. While this lowers Nomura’s 2019 outlook to 13% webscale spending growth from 17%, it builds into the firm’s high-teens growth for the 2020 full year.
U.S. spending fell 5% in the first quarter before recovering to 12% growth in the second quarter and now 20%. This was not the expected 31% growth. And all six US webscalers posted spending below estimates, led by Facebook (-3% quarter over quarter vs. +22% estimate), Amazon (up 17% vs. 26%), and Apple (up 39% vs. 62%).
Nomura further detailed in the report:
While our field work shows a long runway for public cloud, growth is undeniably slowing. AWS growth, once >50%, is now 35%. Azure growth, once >100%, is now 59%. Webscale spending growth, 25-45% from 2016-18, is set for a 10-20% advance through 2020E. The memory upcycle likely drove much of the 2016-18 growth; bottoming prices could help drive a 2020E recovery. The Street is modeling 17% YoY growth in global spend next year, above our prior 16% estimate, though from a lower 2019E. Amazon and Microsoft’s outlook rose; Alibaba, Tencent, and Facebook’s fell.
The research firm’s preferred networking plays are Juniper Networks, Inc. (NYSE: JNPR) and Ciena Corp. (NYSE: CIEN). Juniper posted a second consecutive quarter of year over year growth in Cloud. Ciena sales should decelerate in 2020, though 6% plus remains healthy.
Nomura’s preferred semiconductor plays are Advanced Micro Devices, Inc. (NASDAQ: AMD) and Intel Corp. (NASDAQ: INTC). The firm thinks AMD’s share gain momentum in both data center CPUs and GPUs and Intel’s mid-teens growth potential in its data center group make both stocks attractive webscale plays.
Finally, Nomura also prefers Alphabet Inc. (NASDAQ: GOOGL) and Microsoft Corp. (NASDAQ: MSFT). Alphabet’s Google Cloud Platform is now at an $8 billion run-rate and continues to scale with expanding headcount, M&A, and external partnerships. Microsoft derives a third of sales from Intelligent Cloud and grew Azure 59% year over year in the third quarter.
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