Microsoft has transformed its business model from a component-driven model (PC, server) to one driven by the need for cloud capacity. The cloud was big in the 2019 earnings reports and will remain a growing part of the software giant’s earnings profile.
Many Wall Street analysts agree that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offerings, and which continues growing at triple-digit levels. Some have flagged Azure as the biggest rival to Amazon’s AWS service. Other analysts maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.
Jefferies had this to say when the company reported results last month:
Microsoft reported strong fiscal second quarter results across the board with Azure accelerating to an impressive 64% year over year growth rate vs. 63% last quarter. Total revenue growth was 15% and management guided double digit revenue growth and 2% of operating margin expansion in fiscal 2020. We continue to see strong visibility into double digit percentage revenue growth, supported by multiple drivers (Intelligent Cloud, Productivity & Business Processes) and secular trends for the foreseeable future.
Shareholders receive a 1.5% dividend. The $195 Jefferies price target was lowered to $190, and the consensus target was last seen at $194.19. Microsoft stock retreated 4.5% on Wednesday to close at $153.63.
This smaller-cap company remains a potential takeover target and is a member of the Jefferies Franchise Picks list. RingCentral Inc. (NYSE: RNG) offers a cloud-based solution for business communications that replaces legacy and expensive on-premise communications systems. It is delivered as an application that follows the user regardless of device (office phone, smartphone, desktop, tablet). Features include voice, text, fax, audio conferencing and integration with document and customer relationship management systems.
For some time, Jefferies has believed the company has multiple catalysts, including continued traction with mid/enterprise customers, increased partner traction, international expansion and continued dislocation in the industry from legacy PBX/UC vendors.
Last year, Avaya entered into a strategic partnership with RingCentral in which it will introduce a new unified communications as a service (UCaaS) solution. Under the agreement, RingCentral will contribute $500 million to the deal and will be Avaya’s exclusive provider of UCaaS solutions.
The Jefferies price target is $245, in line with the $245.61 consensus figure. Wednesday’s $199.34 closing share price came after a 6.8% fall on the day.
This stock had an incredible 2019 and remains a top pick at Jefferies. ServiceNow Inc. (NYSE: NOW) develops and sells a hosted, subscription-based suite of services designed to automate various IT department functions, such as help desk, operations management and change/release management.
The company also sells a number of applications that automate various self-service related applications outside of the IT department, such as HR onboarding, facilities requests and governance, risk and compliance.
The company on Wednesday said it released a new version of its cloud software with artificial intelligence technology designed to fix practical problems, such as helping users reset forgotten passwords. For example, if an employee needs to reset a password to access human resources software, the person can talk to a virtual assistant in the ServiceNow system that can ask a few questions and reset the password automatically. The system uses a technology called natural language processing to understand the request.
Jefferies has set a $360 price objective. The consensus price target is $360.94, and ServiceNow stock closed most recently at $290.63. It retreated over 7% on Wednesday.
The market volatility is a clear sign that any trading bottom is not close to being put in. With that caveat noted, aggressive accounts may want to slowly scale in some capital to start building positions in these five top companies, which all should still be standing long after the COVID-19 threat has been removed from the headlines.