In a research noted previewing the year ahead for Application and Infrastructure Software, Piper Jaffray analyst Alex Zukin makes four “bold predictions” for 2019. His “low probability predictions that would have market-changing implications” include a spinoff of Amazon Web Services from Amazon (AMZN), creating the second most valuable enterprise technology company behind only Microsoft (MSFT); Oracle (ORCL) going private with Larry Ellison taking a page from the Michael Dell playbook; Google (GOOG; GOOGL) Cloud Platform acquiring ServiceNow (NOW); and Salesforce (CRM) and Workday (WDAY) agreeing to merge in an all-stock transaction.
AWS SPINOFF FROM AMAZON: Zukin’s first “wild” prediction focuses on the potential spinoff of AWS from Amazon. The event would create the second most valuable enterprise technology company, behind only Microsoft, he noted, and would “make sense for a multitude of reasons.” The analyst told investors that he believes that one of Azure’s strongest selling points against AWS is that Microsoft is not viewed as a competitive threat in the Retail, Financial, Logistics or Health Care verticals. By separating AWS from the e-commerce giant’s other business interests, this issue is eliminated, he contended. Further, Zukin argued that spinning out AWS would unlock a great deal of shareholder value for Amazon’s owners as he estimates AWS would be worth as much as $425B as a standalone company, which compares to Amazon’s current enterprise value of approximately $650B.
ORACLE GOES PRIVATE: Oracle going private is the second “wild” prediction made by Piper Jaffray’s Zukin. The analyst pointed out that it seems “clear that Larry Ellison and Oracle’s senior management team believe that shares are being significantly undervalued by the market today.” The success or failure of Oracle going forward is predicated on maintaining high share of the database market and successfully moving its cloud applications business to the cloud, he contended. With Public Cloud vendors weighing on share gains in the database market and widespread adoption of Cloud ERP being 5-10 years away, Zukin believes going private and navigating these changes as a private company would “make a lot of sense.”
GOOGLE BUYS SERVICENOW: Google Cloud Platform acquiring ServiceNow as part of “Thomas Kurian’s quest to be anointed Cloud King” is another low probability prediction that would have market-changing implications. The analyst pointed out that GCP is a clear number 3 player in the public cloud, significantly trailing both AWS and Azure by market share. Technologically, Zukin’s checks and CIO conversations suggest that GCP can compete effectively against the two larger incumbents with particular strength in AI/ML. Where GCP has faltered is in its ability to sell to the large enterprise, he contended. The analyst believes that in potentially acquiring ServiceNow, Google would not only be acquiring a best-in-class asset with minimal to no competition in ITSM, but more importantly the company would be acquiring what is “arguably the best assemblage of talent purely focused on selling to the IT departments of large enterprises” and eliminate - or significantly reduce - the biggest hurdle in Google’s aims at gaining market share in the Public Cloud.
SALESFORCE, WORKDAY MERGER: Lastly, Piper Jaffray’s Zukin sees potential for a Salesforce and Workday agreement to merge in an all-stock transaction. With Workday’s proven success in the large enterprise and leadership position in arguably the largest market in all of application software, the company would complement Salesforce’s selling efforts and provide the company “entrée into what should become the most durable cloud growth market outside of the Public Cloud,” where Microsoft and Amazon have a stranglehold on the market, the analyst added.
TWILIO, ZENDESK TARGET UPPED: Piper Jaffray’s Zukin also raised his price target for Twilio (TWLO) to $110 from $95 and for Zendesk (ZEN) to $85 from $72.50, while reiterating Overweight ratings on both stocks. The analyst also noted that his top picks for 2019 are Twilio, Zendesk and Adobe (ADBE) as he believes all three possess a combination of strong fundamentals given their respective leadership positions in large markets and positive numbers revisions on already discounted valuations versus peers.
PRICE ACTION: In afternoon trading, shares of Amazon and Oracle have gained about 3%, ServiceNow and Salesforce have advanced almost 4%, and Workday’s stock has risen over 1%. Meanwhile, Class A shares of Alphabet are fractionally down.
