Large traditional enterprise tech companies – sometimes referred to as “legacy tech” – have been revitalizing their cloud technology stories. This resurgence has been benefitting their stock prices as investors get excited about cloud growth. There may be a lot more upside ahead.
This is a new trend counter to the past few years, when investors were less interested in large enterprise tech and more interested in fast-growing consumer giants such as Apple (AAPL), Facebook (FB), Google (GOOGL), and Netflix (NFLX) – or recent enterprise tech Initial Public Offerings (IPOs) such as Crowdstrike (CRWD), DataDog (DDOG), and Zscaler (ZS).
The largest tech conglomerates, such as Cisco (CSCO), Oracle (ORCL), HPE (HPE), and IBM (IBM) have recently been amping up their cloud stories to regain investor interest. Some of those that have done the best at telling this story, such as Oracle and HPE, have seen their stock prices jump 40-50% in the past year. Others have work to do. Even a set of smaller traditional enterprise technology companies such as F5 Networks (FFIV) and Juniper (JNPR) have seen their stock prices surge recently after refreshing their product lines with cloud software driven by acquisition. Juniper’s recent acquisitions of Mist, 128 Technology, and Apstra stand out as software-driven acquisitions. F5 recently bought Volterra, which has promise in the multi-cloud and hybrid cloud space.
Microsoft is in a category by itself. Years ago under CEO Satya Nadella, it positioned itself as a cloud startup, making the investment in cloud Infrastructure as a Service (IaaS) platform Azure as well as transitioning the bulk of its products to the cloud. Microsoft got a head start, and now the rest of the traditional tech world is trying to follow that blueprint.
It’s good timing for the traditional enterprise technology companies. They trade at cheap valuations relative to the rest of the market, and they have dozens of product lines acquired through decades of organic growth and acquisition. Many of these products have the potential to be reborn as cloud-based, software as a service (SaaS) products, increasing their value and causing a “re-rating” of their share prices.
There is also plenty of time. Despite all the cloud growth demonstrated in the past few years, enterprise customers have only started moving to the cloud. Most research estimates put the percentage of the cloud technology spend at 15-20% but growing fast. That has accelerated in the past year, as the pandemic has increased digital transformation efforts. For example, industry firm IDC predicts at least 80% of enterprises will accelerate their moves to a cloud-centric infrastructure.
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Let’s take a look at some of the recent strategies some of these companies that have drawn new investor interest.
Oracle Catches Fire
Oracle, led by long-time Co-founder and Executive Chairman Larry Ellison, might be the perfect example of what can happen to a traditional tech company when it gets its cloud strategy together.
When Ellison was the CEO of Oracle a decade back, he was famous for calling the cloud “gibberish,” but eventually he realized the joke was on Oracle, as competitors such as Salesforce.com (CRM) stole the show. Oracle worked hard to reorient its portfolio toward cloud-based annual recurring revenue (ARR) with SaaS and IaaS offerings. It’s now regarded as being amont the top five public cloud service providers, along with Amazon, Microsoft, Google, and IBM.
Oracle shares have recently caught fire on the revitalization of its cloud story. Bob Evans, the founder of Cloud Wars industry website (as well as a former Oracle executive), described the turnaround in Oracle’s cloud strategy last year with Oracle Cloud Infrastructure (OCI): “Ellison then flipped the script to portray the formerly moribund Oracle infrastructure business as the new engine for Oracle’s growth and relevance,” wrote Evans in a recent article.
The new mix of cloud products includes OCI, Oracle’s IaaS business, as well as Oracle Analytics cloud and Autonomous Database, which is showing year-over-year growth in excess of 50%. Wall Street has gotten ahold of the story and the stock is up 46% since last summer.
Progress for HPE, Cisco Cloud Pivots
When viewed first through the lens of investment valuation, HPE stands out. In a world of red-hot meme stocks, cryptocurrency manias, and high-tech valuations, HPE shares are cheap. With $27 billion in annual sales and a market cap of $20 billion, HPE sells for less than one times (1x) sales. With analyst consensus estimates for next year pegged at $1.92, according to Finviz.com, the forward price/earnings (P/E) ratio of HPE is only 8.5. Crowdstrike, for example, has about $1 billion in trailing twelve months revenue and trades with a market capitalization of $48 billion (55x sales) and a forward P/E of 355.
HPE, like Oracle, has also been working on repositioning toward cloud and ARR software models. Cloud-based revenue streams include HPE’s Greenlake “IT-as-a-service” business as well as its Aruba enterprise wireless division. These are fast-growing enterprises with a cloud bent. Greenlake is HPE’s strategy to transform its legacy business of selling hardware and services into a service model in which the hardware is included in the service. HPE CEO Antoni Neri claims it is growing in many public cloud services.
Neri told shareholders at a virtual meeting in April that HPE’s “industry leading” GreenLake Cloud Services portfolio is the “broadest in the market” for supporting edge-to-cloud workloads, including public cloud environments.
Aruba is another exciting place to look for growth embedded inside of HPE. Its edge networking products are being integrated with the recent acquisition of Silver Peak into the red-hot Secure Access Service Edge (SASE) trend. At the same time, it’s bundling software-based security products into these cloud services as part of its Edge Services Platform (ESP).
Cisco Systems doesn’t want to be left out of the cloud party either, even though it was slower than many other large enterprise tech companies in recognizing the importance of cloud. But recent acquisitions such as Duo Security, ThousandEyes, and App Dynamics have helped Cisco move to an ARR software model, away from its traditional dependence on hardware sales.
Cisco CEO Chuck Robbins recently pointed to progress in the migration to a software and subscription business model, with 76% of software revenue sold as a subscription in its last quarter. Cisco shares are up about 28% in the past year and they attract conservative investors appreciative of the 3% dividend.
IBM: A story Unto itself
For long-suffering investors in IBM who are awaiting the company’s cloud surge, the story is more complicated. The sprawling nature of IBM, complicated by its opaque and difficult-to-understand financial structure, make it hard for investors to track progress.
The biggest challenge to IBM is revenue growth, which has been stagnant. Its fourth quarter 2020 report showed revenues fell 6% year-over-year. IBM’s plan is to double down on artificial intelligence (AI) technology and its hybrid cloud product and services lineup, which is spearheaded by Red Hat.
Relatively new CEO Arvind Krishna is working hard to rebuild IBM by splitting up the company and focusing on the cloud assets. With Red Hat under its belt, IBM definitely has the resources to make a big splash in cloud.
Investors remain hopeful. IBM shares are up about 15% in the past year and recently struck a 52-week high.
Mid-size Enterprise Independents
Another promising area of revitalization can be found among some of the independent enterprise networking companies that are trying to rebuild themselves with acquisitions and software.
Juniper Networks has a lot of potential, and there are clues that investors have noticed as its share price has recently perked up. Recently, Juniper has been talking about how its software and AI strategy can help enterprises automate cloud networking and security. Juniper sees its $450 million acquisition of 128 Technology is part of this strategy, targeting the hot software-defined wide-area networking (SD-WAN) and SASE markets. It believes its 2020 acquisition of Mist for $405 million gives it better cloud automation and AI chops. More important, Juniper has refreshed its networking and security business with a software-focused strategy, including virtual firewall services.
Rami Rahim, Juniper CEO, recently pounded on this theme in an industry briefing.
“[We are] focusing on three business areas, each representing a different network use case: wide-area network solutions that can handle cloud scale and agility; cloud-ready data center solutions for public and private data centers; and cloud-delivered, AI-driven solutions for the enterprise. And of course security is a foundational element to everything.”
The secret is out: Bang the drum about your cloud and software revenue streams, and the market will respond. Juniper shares are up 30% in the past year.
Traditional Tech Can be Reborn
There are many great stories of traditional technology companies that can be reborn with growth and a forward-facing attitude. To date, Microsoft remains the best example, the gold standard for transformation.
In the past year, many of the largest technology companies have made significant progress in orienting themselves to the cloud, generating success in growth of both revenues and share price. So far, HPE and Oracle appear to have made the most progress, with Cisco starting to kick into gear. IBM remains a story in progress.
For cloud technology investors who can’t afford the stratospheric valuations of a younger crop of technology companies, traditional tech might be the place to look for some upside in the next couple of years.