Three-Year ‘Super Cycle’ in Enterprise Buying to Boost Software Providers

A recent survey from Deutsche Bank indicates that Microsoft and its peers in the enterprise software space will benefit from a revival in IT spend following an 8-year decline.

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According to a team of bulls at the investment bank, Microsoft stock is poised to jump another near 25% over the course of 12 months to reach $120 per share as the Redmond, Washington-based company gains on businesses’ need to undergo “digital transformations.”

The note comes after Deutsche Bank’s Karl Keirstead took a visit to the tech pioneer’s headquarters, where executives were meeting with a group of investors last week. Keirstead indicating that he left feeling more optimistic regarding the firm’s prospects, particularly as it is destined to see a lift from a “three-year super cycle” in enterprise buying. The mainstream shift away from bulky on-premise data centers to public cloud computing platforms such as Amazon Web Services and Microsoft’s hybrid cloud offering Azure is just part of it, said the analyst.

As for the cloud, providers are set to gain on taking a share of the 90% of enterprise workloads that remain on-premise.

“Many F500 CIOs are recognizing the imperative of ‘digital transformations’ and utilizing technology to grow and to prevent disruption such that the desire to modernize their on-premise infrastructures is now so strong that it is outpacing any drag from the move to the public cloud model,” wrote the Deutsche Bank analyst.

Keirstead added that if the notion of a three-year super cycle of enterprise IT spending is “even remotely accurate, this current rally in enterprise tech stocks may have plenty of room to continue.” He highlighted the recently passed GOP tax overhaul, which slashed the corporate tax rate from 35% to 21%, providing another boost to software providers. He expects an improving economy to trickle down to IT spend, providing a breath of fresh air for enterprise software companies who have experienced “anemic” spending growth following the 2008/2009 recession.

“Technology is indeed becoming a greater competitive weapon, moat and productivity lever in many industries (motivating many to “digitally transform”),” wrote the analyst.

Ultimately, Deutsche sees the possibility of a longer duration IT spending uplift justifying software companies’ peak valuation multiples after last year’s rally.