Hyperscale cloud and data center operators spent a whopping $22 billion on capital expenditure (capex) in the final three months of 2017, bringing last year's total to nearly $75 billion, according to Synergy Research. Major hyperscale cloud spenders Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Facebook Inc. (FB) and Google parent company Alphabet Inc. (GOOGL) accounted for three quarters of a 29% jump in cloud capex spending over last year, according to a recent report by Morgan Stanley. (For more, see also: Amazon Rivals Protest Pentagon’s Giant Cloud Deal.)
Receivers of Cloud Capex Spending to Outperform
While new Trump tax cuts have freed up billions for some of America's largest corporations, notably tech giants with mounds of cash ready for overseas repatriation, the companies on the receiving end of spending may see a greater boost from the uptrend, as noted in a recent Barron's story. Researchers have found that companies with high capex relative to their top line actually tend to underperform the broader market. That being said, aforementioned public cloud providers, alongside competitors like Alibaba Group (BABA), are likely to see their investments in infrastructure pay off as revenues in the space are projected to skyrocket nearly 50% in 2018, as highlighted in the Barron's report published May 15.
Morgan Stanley analysts highlighted eight stocks positioned to boom on the lift in cloud spending, including Cisco Systems Inc. (CSCO) rival Arista Networks Inc. (ANET), chip makers Aspeed Technology and LandMark Optoelectronics, as well as real estate investment trusts CyrusOne Inc. (CONE) and Digital Realty Trust Inc. (DLR), and harddrive maker Seagate Technology (STX).
Cisco Rival ANET Growth Is 'Just the Beginning'
San Jose, Calif.-based Arista saw its stock soar last week after the its annual analyst day meeting in which the firm unveiled a handful of new products set to rival old guard networking giant Cisco in the campus networking space. Analysts applauded a market opportunity pegged at about $3 to $4 billion, while Arista said not to expect "material" revenue from the initiative until 2020. "For us, ANET’s attraction as a stock is the push into new markets, including campus, that the company is just beginning," said Morgan Stanley's James Faucette, who rates ANET at overweight. The stock has gained 6.4% year-to-date (YTD) and nearly 70% in the most recent 12 months, outperforming the broader S&P 500's 1.9% increase and 13.5% return over the same respective periods.
Data Service Providers Land Mega-Deals
Last month, analysts at Cowen highlighted data services providers CyrusOne and Digital Rlty as top picks in their segment, applauding CyrusOne's new contracts including a 10-megawatt deal with Microsoft, a 6-MW deal with Salesforce.com Inc. (CRM) and a 3-MW deal with Alibaba, as well as Digital Rlty's continued closing of deals of 10MW or less as it targets firms that are growing but do not need the same space as "heavyweight" mega-cap companies. CONE is down nearly 11% YTD and 2.6% over 12 months, while DLR has sank 6.5% and 7.6% over the same respective periods.
Morgan Stanley also mentioned that shares of well-known companies Nvidia Corp. (NVDA) and Broadcom Ltd. (AVGO) are likely to continue to outperform on the cloud capex trend. (For more, see also: Microsoft to Gain on New Enterprise Buying: Bulls.)