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Google-Lookers and Salesforce-Tableau: what’s the trading opportunity?

We have a look at the trading opportunity as M&A in the cloud computing market heats up following news of Google’s purchase of Looker and Salesforce’s acquisition of Tableau, and outline 15 other stocks to keep an eye on.

Companies have been obsessed with finding new ways to collect more data, but less thought has gone into how to analyse it all. Businesses, now inundated with information, are realising their treasure troves of data are useless if they can’t utilise it and are recognising the need to visualise data in real time to drive decisions across their organisations.

This shift is starting to pan out in the cloud computing market. The success that has been found in the space has so far been largely predicated on building new applications and uses for the cloud. However, it is widely recognised that cloud computing will be driven by a new wave of technology over the coming years, based around the likes of artificial intelligence (AI), machine learning and, of course, data analytics.

The big three cloud providers – Amazon, Microsoft and Alphabet's Google – control the lion’s share of the market but the industry is still rapidly growing and experiencing an equally fast pace of change. The fundamental shift occurring in the industry is pressuring existing players, like Google, to diversify, and that is being exacerbated by the fact more big name companies, like Salesforce, are making a bigger push into the market.

For both the existing cloud providers that are striving to maintain their lead and the new entrants acting on their ambitions to break into the fast growing industry, the solution lies in snapping up some of the many startups that have emerged over the years. Many of these smaller firms have built their name by focusing on just one of the many niches in the market but now, with their services improved and with better infrastructure around them, find themselves becoming more valuable.

Google to buy Looker Data Sciences

Google has announced plans to purchase Looker Data Sciences, which helps companies analyse and visualise the data they keep in the cloud in real time, for $2.6 billion in cash by the end of 2019. It represents Google’s biggest acquisition since it bought smart home product maker Nest Labs for $4.7 billion in 2014.

It is also a clear signal from the boss of Google’s cloud business Thomas Kurian, who promised to accelerate growth and expand the business when he joined in November 2018 after leaving his long term role at Oracle.

Google’s search advertising business remains at the heart of Alphabet and accounts for the vast majority of earnings, but the company is keen to capitalise on its fast growing cloud computing business.

Revenue was up 17% in the first quarter (Q1) of 2019 but, despite delivering such remarkable growth for a business of its size, this still missed expectations. It was also considerably slower than the 26% increase reported a year earlier, and the 24% growth recorded in the final three months of 2018. The company provided a string of technical reasons for the weaker than expected performance, such as tough comparatives and unfavourable exchange rates, but that didn’t allay fears that growth in the core search advertising business is slowing down.

Operating margins are also tightening, to 18% in Q1 from 25% the year before. Together, this means Google is battling against slower growth and lower profitability in its search advertising business. Alphabet shares closed down 7.5% on the day it released its Q1 results at the end of April – the worst daily decline on record in almost seven years – and shares have fallen further since. This gives it good reason to invest in smaller but faster growing parts of the business, such as the cloud.

But Google is still third in the race and behind its rivals Amazon and Microsoft. Amazon Web Services (AWS) is the dominant leader in the market after booking $7.6 billion in revenue in Q1 of 2019 while its closest competitor, Microsoft Azure, generated $3.4 billion, according to tech market research firm Canalys. Google, which doesn’t break out individual figures for its cloud business, is thought to have booked $2.3 billion in quarterly revenue.

Read about how Google is to spend $13 billion on US data centres

Google is, however, the fastest growing of the three with quarterly revenue reportedly up 84% year-on-year (YoY) – ahead of the 75% growth recorded at Microsoft and the 41% rise at Amazon.

Why is Google buying Looker?

Google is buying Looker to step up its game. While Microsoft and Amazon have developed their own data visualisation and analytical tools - Microsoft’s Power BI and AWS Quicksight – Google has had to buy Looker to keep up. This has raised questions about whether Google struggled to nurture its own offering or was simply too slow to the party.

Google was already an investor in Looker through its investment arm Capital G and has chosen to buy the business outright for a few reasons. Firstly, the pair already share a customer base that could yield potential synergies with around 350 clients using both Looker and Google Analytics, including media outlet Buzzfeed and Yahoo!. That is quite the crossover considering Looker has about 1700 clients overall, including Lyft and Sony. That means over one fifth of Looker’s clients also use Google Analytics. Secondly, there were reports that Looker was on the radar of both Amazon and Microsoft.

Thirdly, Looker is what is known as a ‘cloud neutral’ firm – one that works with multiple cloud platforms, including AWS and Azure. It is becoming increasingly clear that businesses are choosing to use numerous cloud providers rather than be locked in to a single provider, and that these cloud neutral firms will be the winners of the next wave of the cloud. Google has said Looker will continue to work with other cloud platforms, including that of its main rivals, in recognition of this. Google recently launched an application management platform named Anthos to support multiple cloud environments, and other companies including IBM are also banking on businesses using several providers.

Salesforce to buy Tableau

Salesforce, the leader in customer relationship management (CRM) software, announced an even bigger acquisition just days after news of the Google-Looker tie up with a $15.7 billion all stock bid for Tableau Software. It is Saleforce’s biggest ever acquisition and follows on from its $6.5 billion purchase of Mulesoft, which integrates software and applications in the cloud or in individual business networks, last year.

Tableau’s data visualisation tools compete directly with that of Microsoft Power BI, AWS QuickSight and Looker, and the company’s price tag proves Salesforce is willing to invest huge sums to ensure it is fit for the future, and demonstrates the value it attributes to analytics.

Why is Salesforce buying Tableau?

Those with a bullish stance on the deal will argue Salesforce has taken the right steps to fend off intensifying competition from the likes of Microsoft, Oracle and SAP Systems, all of which offer their own CRM and analytical services.

But those with a bearish stance will question the price tag that has been slapped on a loss making business and the need to buy the company right now. Salesforce may be a behemoth with a market cap of over $120 billion but revenue growth is still in the strong double digits: rising by 26% in the three months to the end of January 2019 to $3.6 billion. That was a slight uptick from the 25% YoYgrowth reported the year before.

But Salesforce will argue it is right to invest when the business has momentum rather than wait and risk being left behind. Still, this clearly comes at a price with operating costs rising by almost one third in the latest quarter – outpacing revenue growth – as it invested more in research & development (R&D) and marketing. Salesforce is paying a premium of almost 50% for Tableau and over 13x the company’s most recent annual sales, leading some to question the deal’s value for money.

Salesforce has huge growth ambitions over the next three years with a target to deliver annual revenue of between $26 billion to $28 billion by the end of the financial year to the end of January 2023 – double the $13.3 billion delivered in its most recent fiscal year. It will be hoping that Tableau can play a role in that, stating the acquisition will bolster annual revenue in the current financial year by between $350 million to $400 million, assuming it is completed by the start of October as planned. However, the future contribution Tableau can add to Saleforce’s bottomline is unclear: Tableau reported an annual loss of $77 million in its last financial year on sales of almost $1.2 billion. Salesforce has said its operating margin will tighten by around 75 basis points this year as a result.

Will there be further M&A in the cloud computing market?

The two deals are not the first to be struck in the space and are unlikely to be the last. Just a day before Google announced its bid for Looker, Microsoft and Oracle announced they are stepping up their six year relationship in cloud computing to bolster their offense on runaway leader Amazon. And last year we saw numerous big ticket deals completed, including IBM’s purchase of open source technology firm Red Hat for $34 billion and SAP Systems’ $8 billion acquisition of data collection and analysis firm Qualtrics.

Up in the clouds: where next for IBM stock after Red Hat acquisition

There are dominant forces tightening their grip on the market, but it remains highly fragmented and ripe for consolidation. Plus, other technologies will continue to become more relevant as developments in cloud computing advance, creating further takeover targets for the incumbents. Investors and traders should expect this period of takeovers and partnerships to continue and, based on the premium valuations being assigned by the big boys, see the potential opportunity it presents.

Business Intelligence and data analytical stocks to watch

There are a wide variety of tech companies to keep an eye on amid the ongoing consolidation in the market. Those involved in areas such as machine learning, AI and data analytics will all be on the radar over forthcoming years and we have listed 15 potential targets below. Their precise activities are diverse, from Crowdstrike’s use of machine learning to detect malware on gadgets to Five9’s cloud based customer support services, or Trade Desk’s automation services for online advertisers.

Read more about 10 cloud tech stocks to watch

They vary in size in terms of market cap, from a few hundred million dollars to over $19 billion, but most of them have seen their share prices soar over the last 12 months. Yet, the vast majority are still regarded as undervalued and boast Buy valuations, as according to Reuters on 18 July 2019. The mean rating provides a more detailed insight to the overall recommendation provided by brokers and is based on a scale of 1 (Strong Buy) to 5 (Strong Sell), meaning the lowest scores represent the strongest endorsements.

Market Cap (bn) 12-month share price movement to June 18, 2019 Broker Recommendation No. of brokers Mean rating
Twilio $19.2 128% Buy 24 1.67
Splunk $18.3 1.80% Buy 39 1.87
CrowdStrike $15.3 20.7%* N/A 0 N/A
Trade Desk $11.1 167% Buy 16 1.94
Zebra Technologies $10.9 27% Buy 9 1.78
EPAM Systems $9.5 37% Buy 14 2.14
Alteryx $6.8 163% Buy 13 2.00
Elastic $5.7 7.9%** Buy 13 2.31
New Relic $5.6 -14% Buy 17 2.06
Five9 $3.2 35% Buy 16 2.44
Yext $2.3 4.80% Buy 9 2.11
Cloudera $1.7 -63% Hold 20 2.55
Talend $1.2 -34% Buy 8 2.12
Domo $0.8 12%*** Buy 7 2.00
Veritone $0.2 -65% Buy 5 1.6

*Crowdstrike listed on June 12, 2019

**Elastic listed on October 5, 2018

***Domo listed on June 29, 2018

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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