Beyond Red Hat — here are other cloud companies that could be takeover targets

Even though the concept isn’t new, “cloud” is a buzzword that IT executives can’t get enough of.

The latest executive is Ginni Rometty, CEO of IBM.

IBM is paying a 63% cash premium for Red Hat, which smacks of desperation. We’ll list as many cloud companies as we can, below, to find other potential takeout targets.

“Cloud computing” means sharing computer resources over the internet to improve efficiency while enhancing collaboration. It has simplified the management of network functions for countless companies. One might say that almost any large company with workers in more than one location had better make use of cloud computing, and just about every large technology company is making use of cloud services.

In fact, way before it agreed to pay the whopping premium to acquire Red Hat

RHT, +44.78%

International Business Machines

IBM, -3.04%

 was already highlighting its cloud activities at the top of the business description in its 2017 annual report.

The company said the “IBM Cloud is uniquely … built for all applications,” as well as “artificial intelligence (AI)-ready,” and is “secure to the core.”

So according to the company, IBM already had its cloud act together. It also has emphasized its overall strength in AI, “cognitive solutions,” and helping “clients and developers across multiple industries to use blockchain to transform how business is done in areas such as banking and financial services and supply chain.”

The list of buzzwords is endless, and it seems IBM covers ever single one of them. And they aren’t alone.

This means it is very difficult to define “cloud companies.” The First Trust Cloud Computing ETF

SKYY, +0.64%

 had $1.75 billion in assets as of the close on Oct. 26. According to FactSet, SKYY “is the only ETF on the market that focuses on cloud computing, but its complex methodology highlights the difficulty of capturing this particular space.” Well said.

First Trust says the ETF holds shares of companies in three categories:

• “Pure-play cloud-computing companies.”

• “Non-pure-play cloud-computing companies.”

• “Technology conglomerate cloud-computing companies.” This last category includes IBM, as well as other IT giants, including Apple

AAPL, -0.25%

Microsoft

MSFT, -1.50%

Amazon

AMZN, -5.25%

Facebook

FB, -0.85%

Netflix

NFLX, -5.61%

 and Alphabet

GOOG, -2.56%

GOOGL, -2.63%

Oracle is also included in that last group, but Daniel Newman argued last week that its “results as an emerging leader in the explosively growing cloud market are far from convincing.”

The ETF portfolio is weighted 10% for the conglomerates, while the non-pure-play cloud companies weighted by market cap among all the non-conglomerates in the portfolio, with the rest of the weighting pure-play cloud companies. “This takes SKYY far afield from our broader technology segment benchmark, tilting to mid-caps with significant sector biases,” FactSet says.

FactSet concludes: “While SKYY isn’t cheap, its fee is about average for a niche fund with a unique methodology and approach, and tracking is generally good.” The ETF’s annual expenses are 0.60% of assets. It has performed very well over the past five years when compared to the S&P 500 Index

SPX, +0.44%

:

FactSet

Since “cloud” is not a sub-industry generally recognized by the data providers that maintain the major stock-market indices, the ETF’s portfolio is a reasonable list for the space.

‘Cloud’ list

Companies such as Apple and Microsoft obviously will not be takeover targets. However, rather than to exclude them from the list, here are all 29 companies held by the ETF by ascending market value, with changes in sales for their most recently reported quarters through Oct. 26 and 2018 total returns:

You can click the tickers for more information about each company, including profiles, news, price ratios, charts and financials.

It’s fascinating to see that big companies at the bottom of the list showing the best sales growth, with some exceptions. Red Hat was in the middle of the pack.

Analyst opinion

As of the close on Oct. 26, the consensus price target for Red Hat among analysts polled by FactSet was $168.92, which is now meaningless, as IBM has agreed to pay $190 in cash for the shares. So here’s a summary of analysts’ ratings and price targets for the companies held by the ETF, excluding Red Hat. We’re keeping the list in the same order as the one above.

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