What will the software market look like by the end of 2019? RBC Capital has delved into its crystal ball to find out. The firm has just released a report highlighting five potentially transformational software deals that could take place this year.
In fact there’s already strong momentum in place. In the last six months of 2018, 14 software transactions occurred with a value of over $1 billion. Most notably, IBM (NYSE:IBM) snapped up RedHat for a whopping $34 billion in October 2018. Could we now be building towards something even bigger?
Bear this in mind, the sheer amount of dry powder (read:money) available is truly astounding. RBC Capital has calculated that the total cash available for a deal exceeds $1 trillion. That figure could go even higher if we add sovereign funds to the equation.
For example, if we zero in on some of the large-cap tech vendors, then Alphabet (NASDAQ:GOOGL) has a whopping $106.4 billion at its disposal in gross cash and marketable securities. Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) both have even more available at $137.9 billion and $237.1 billion respectively.
Let’s now dive into five potential deals, ranked in order of highest probability:
Software Deal 1: Google or Cisco Buys Nutanix (NTNX)
Word on the Street: the hybrid-cloud market could be worth more than $60 billion by 2021. And one of the key players in the field is Nutanix Inc (NASDAQ:NTNX) — a leading provider of hyperconverged infrastructure solutions.
Would such a proposition appeal to tech heavyweight Alphabet? Its Google Cloud Platform (GCP) is the third-largest public-cloud vendor by revenue and has remained primarily cloud-native with smaller deals.
By acquiring Nutanix, GCP would gain an enterprise software sales force and be able to leverage trends in hybrid-compute through the Nutanix Enterprise Cloud Platform.
Also keep an eye on Cisco (NASDAQ:CSCO). CSCO is already in the Hyper-Converged Infrastructure (HC) market, but adding Nutanix to its capabilities would catapult it to becoming a market leader.
“We believe that Nutanix could not only aid Cisco’s traditional networking/hardware business, but it could also better position the company to sell more virtual firewalls (micro-segmentation)” says RBC Capital.
But is Nutanix even up for sale? The short answer is that yes — at the right price it could indeed be a willing seller, according to RBC Capital. If such a deal did go ahead, it could disrupt large vendors such as IBM/Red Hat, AWS/VMware and Microsoft Azure that are already fully vested in hybrid-compute.
If you are thinking of investing in Nutanix, check out the stock’s bullish ‘Strong Buy’ analyst consensus rating. That’s with a $62 price target for 25% upside potential.
“We believe NTNX is well on the way to becoming the dominant private cloud infrastructure software resource manager, at the expense of VMware” wrote Maxim Group’s Nehal Chokshi (Track Record & Ratings) earlier this month. His $72 price target indicates sizable upside potential of 46%. Want to learn more about Nutanix? Get the free NTNX Stock Research Report.
Software Deal 2: Cisco Buys Splunk (SPLK)
If Cisco doesn’t snap up Nutanix, then rapidly-growing Splunk (NASDAQ:SPLK) could be in the cards. In essence, Splunk turns machine data into answers. It captures and uses real-time data to generate graphs, reports, alerts and dashboards.
Given the importance of data and data analytics, a Cisco-Splunk tie-up would create a premier data management platform.
What’s more with ~50% of Splunk’s use cases being security-related deals, buying Splunk would also get Cisco deeper into security, which is something the company has talked about in the past.
Right now, Cisco has $43 billion of cash and investments on its balance sheet and has deployed more than $8 billion for software assets since 2017 (the largest being AppDynamics for $3.9 billion and Duo Security for $2.3 billion).
So is Splunk a willing seller? “Ultimately, we believe Splunk could see additional leverage in being able to tap into a larger customer base while continuing to sell more products into existing customers” points out RBC.
From an investor perspective, Splunk scores a bullish ‘Strong Buy’ consensus. That’s with a $135 average analyst price target. “SPLK’s unique platform has positioned it to leverage global data growth into steady revenue growth” comments Oppenheimer’s Shaul Eyal (Track Record & Ratings). Get the SPLK Stock Research Report.
Software Deal 3: Google Buys Shopfiy (SHOP)
Another potential stock on Google’s wish list: Shopify (NYSE:SHOP). Canada-based SHOP is an e-commerce platform. It allows anyone to easily sell online, at a retail location, and everywhere in between.
So why would GOOGL want to buy SHOP?
“At a very high level, the Internet remains over-indexed to advertising vs. commerce, and so in the long-run, we believe Internet advertising heavyweights will want to capture more commerce share in order to grow” explains RBC Capital. Indeed, 5% of global GDP is eCommerce but 75% of Internet GDP is advertising.
Plus although Google monetizes eCommerce through advertising, monetization could be much higher owning an eCommerce platform. Moreover it would also carry network effects like merchant-ad placement advantages.
Amazon (NASDAQ:AMZN) is also a potential contender for SHOP. “It is possible that Amazon could be viewed as an interested party, as it has historically acquired high-quality assets (Whole Foods, etc.) and Shopify and would enable it to consolidate the eCommerce market, though regulatory concerns could run high in this case” writes the investment bank.
Overall, SHOP has received only buy ratings from analysts in the last three months. They have a $168 average price target.
In particular, D.A. Davidson analyst Tom Forte (Track Record & Ratings) has just upgraded SHOP from Hold to Buy. He calls it an “exceptionally” well-run company with the potential for open-ended growth. Get the SHOP Stock Research Report.
Software Deal 4: Google or Microsoft Buys ServiceNow (NOW)
ServiceNow’s (NYSE:NOW) cloud platform streamlines how work gets done. It’s a sizable acquisition target — with a market cap already at $34 billion. That’s with a $10 billion revenue goal over the next five years.
“We think ServiceNow could be one of the more disruptive acquisition candidates as it provides not only a service-automation platform but also a cloud application development platform” says RBC Capital.
Such an opportunity could attract the attention of the market’s biggest players — Google or Microsoft for example.
Google Cloud Platform could make sense as a buyer because it would gain an enterprise sales force and it would have an anchor cloud-application platform that would differentiate it from larger public-cloud rivals AWS and Microsoft Azure.
At the same time Microsoft could use NOW to get more into service, which could be a nice complement to existing cloud applications such as Dynamics and to provide another cloud-application development platform to build out a broader and differentiated cloud application suite.
Of course, the price needs to be right. “We continue to think ServiceNow has the opportunity to become an even larger company on a stand-alone basis” says RBC Capital. “So, at first glance, we don’t think it needs to sell, nor is it necessarily looking to sell. That said… we believe it could be sold if the price were right” the firm concludes.
Such a deal would most likely be the largest software acquisition to date, beating the $34 billion IBM/Red Hat deal.
NOW has received only buy ratings from the Street in the last six months. Get the NOW Stock Research Report.
Software Deal 5: Microsoft (MSFT) Buys Workday (WDAY)
Workday, Inc. (NASDAQ:WDAY) is a provider of cloud-based human resources software. This includes business planning, financial management and human capital management.
Ever since Microsoft bought LinkedIn, RBC has wondered whether MSFT will make a bigger push into Human Capital Management. And Workday would be a perfect fit.
“Workday would appear to be the most interesting asset given its win-rate in enterprise customers for core HCM and the potential to create a differentiated offering by tying LinkedIn data to the Workday Recruiting/HCM platform” says RBC Capital.
Furthermore, WDAY also brings with an enterprise-focused financials application. And Microsoft would also add another asset that can heavily leverage the Azure infrastructure.
“We have always believed that Workday would be a willing seller to a vendor that could accelerate the strategy to make enterprise software easier” the firm tells investors.
Right now, WDAY as a ‘Moderate Buy’ analyst consensus with a $163 average analyst price target. Monness’ Brian White (Track Record & Ratings) is the stock’s biggest supporter (with a $185 price target).
“Overweight WDAY; it has no shortage of growth opportunities” says the five-star analyst. Considering cloud financials is roughly a 2x larger TAM than HCM, Workday has a long growth runway ahead, White explains. Get the WDAY Stock Research Report.
TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.