Editor’s Note: This article was updated on June 9, 2021, to remove an erroneous ticker.
Cerner (NASDAQ:CERN), the medical software company, isn’t having a great year, but CERN stock bas been on a roll since March.
Credit for this goes to the cloud industry. Cloud czars Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) as well as big application players Oracle (NYSE:ORCL) and Salesforce (NYSE:CRM), are looking to roll up the old enterprise software market by bringing preexisting industries into the cloud, including healthcare.
Cerner is one of the larger players in this space. Much of its electronic health record (EHR) software is already cloud-based. It’s also stumbling: its CEO is retiring, and shares selling for just 4.4 times revenue. The most recent quarter showed less revenue than a year ago.
Cerner is a wounded gazelle, and the lions are hungry.
Amazon’s AWS has been Cerner’s cloud partner. Amazon quietly launched a health tracker last year, built around Cerner software. Were another cloud giant to buy Cerner, it would be a direct loss to Amazon.
But that’s not the way Amazon has been playing the game. As far as the enterprise software space is concerned, Amazon is neutral. It doesn’t have an application suite. With a market cap of $23.6 billion, Cerner is also out of Amazon’s normal price range. Amazon’s biggest deal was Whole Foods, which cost $13.7 billion in 2017. Its current big deal is MGM, a bolt-on to Amazon Studios costing $8.45 billion.
If a roll-up is underway in enterprise software, it’s not the first time this has happened. Oracle and SAP (NYSE:SAP) played this game in the 2000s, gaining dominant positions in database software along the way.
Then the game changed. Oracle and SAP have been left behind by the rise of the cloud. Amazon, for instance, has a value over seven times that of Oracle and almost 10 times that of SAP. Long-time SAP CEO Bill McDermott jumped in late 2019 to ServiceNow (NYSE:NOW), a cloud application player more like Salesforce. (ServiceNow has a market cap of $92 billion, so it might be interested in Cerner, too.) Salesforce, meanwhile, is busy swallowing Slack (NYSE:WORK), for nearly $28 billion.
That leaves Microsoft and Google as other plausible buyers.
Microsoft would seem the more logical buyer. Cerner software runs under Windows. Microsoft is the leading cloud vendor according to Cloud Wars, but just number six in industry cloud. Given its dominance in enterprise software, however, the deal may face heavy antitrust scrutiny.
On the other hand, Google Cloud has been very aggressive under CEO Thomas Kurian. It has been writing enterprise deals left and right. Google Cloud’s first quarter revenue was up 45.7% over a year ago, but the unit lost $974 million. On the other hand Google has $135 billion in cash and securities on the books, so it could easily buy Cerner for cash. Given that it’s still third in cloud market share, behind Amazon and Microsoft, it’s less likely to face antitrust scrutiny. It also has cloud entries in healthcare with a healthcare API (application programming interface) and the Fitbit tracker.
The Bottom Line on CERN Stock
Any move on Cerner could set off an old-fashioned takeover battle, with white knights, black hearts and arbitrageurs betting on higher prices.
Absent the takeover premium, Cerner isn’t expensive. It has a cloud-compatible price to earnings ratio of nearly 30 and a 22 cent/share quarterly dividend yielding 1.12%. Once the game is afoot it will be too late to grab a fat profit, so if you’re interested, now is the time.
Whichever cloud giant loses might go after closely-held Epic Corporation, no relation to the game company, to get a stake in the electronic health record market. There are also McKesson (NYSE:MCK) and privately held Meditech.
But Cerner would be the prize, and if so, CERN stock might be worth picking up now.
On the date of publication, Dana Blankenhorn held LONG positions in AMZN, NOW and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack.