The cloud computing industry will be a $1 trillion market by 2020, and tech giants are racing to be leaders in the field.
But instead of starting from scratch and building software and services, it’s much easier for larger firms to acquire leading cloud computing solutions.
Cloud computing is the on-demand delivery of computing power, data storage, and other IT services that remove the need for local or on-site computing storage.
In an era where data drives corporate decisions and strategy, demand for the cloud will make the sector a $1 trillion industry by 2020, according to Gartner.
And you could score a triple-digit gain in the next year if you snap up the most attractive takeover targets…
The Cloud Wars Will Unlock Billions for Investors
In October, International Business Machines Corp. (NYSE: IBM) fired a direct shot at its cloud computing competitors.
“Big Blue” announced it would purchase Red Hat (enterprise software provider) for $34 billion.
And it’s not just IBM that understands how important it is to win the “Cloud War.”
Silicon Valley’s top software and service providers see the cloud as their next huge source of revenue. Microsoft Corp. (NASDAQ: MSFT), Amazon.com Inc. (NASDAQ: AMZN), Alphabet Inc. (NASDAQ: GOOGL), and Alibaba Group Holding Ltd. (NYSE: BABA) are all fighting for a piece of the pie.
Every one of those companies will be buyers of cloud computing firms in the next few years.
And make no mistake: Almost every cloud computing company could be on the block.
I’m talking about a big roster of publicly traded cloud computing stocks, including Workday Inc. (NASDAQ: WDAY), Zendesk Inc. (NYSE: ZEN), LogMeIn Inc. (NASDAQ: LOGM), Tableau Software Inc. (NYSE: DATA), and Box Inc. (NYSE: BOX).
Even the behemoth Salesforce.com Inc. (NYSE: CRM) could be up for grabs if Amazon or Alphabet really wants to get aggressive.
However, I don’t like to throw my money around on a bunch of wild bets in hopes of hitting a big day.
Right now, I’m looking at a stock that is not only a bargain at current prices, but could be one of the biggest takeover targets for a major firm in 2019…
This Impressive Cloud Leader Is the Perfect Takeover Target
The firm I’m watching closely is Dropbox Inc. (NASDAQ: DBX). It’s a file hosting service operator that provides cloud storage, personal cloud, and client software to more than 500 million registered users.
The firm has roughly 300,000 Dropbox business clients and 12.3 million paying customers.
Nearly 56% of Fortune 500 companies pay for Dropbox services, as of December 2018.
DBX went public in March 2018 at $21 per share, and the stock price surged to a 52-week high of $43.50 in June.
However, it has slumped since the lockup period ended in August.
As of Dec. 31, 2018, the DBX stock price was trading for $20.97 per share.
But here’s why I’m not worried…
Dropbox has doubled its revenue in three years. In the third quarter, the cloud firm easily beat earnings expectations with a 26% jump in year-over-year revenue at $360.3 million.
It also reported an 18% jump in paid users.
And even though Dropbox has far more individual users than institutional ones, that doesn’t mean that a large player couldn’t buy Dropbox and engineer it as a broader enterprise solution.
Back in February, Barclays speculated that Apple should buy Dropbox to push iCloud as a corporate competitor to services from Microsoft, Alphabet, and Box.
Other analysts have suggested Dropbox’s cloud service would fit quite well into Microsoft’s product portfolio and help DBX achieve its mission to become the world’s leading enterprise solution provider.
To add more fuel to the acquisition fire, Salesforce.com already owns 1.3% of Dropbox after it injected roughly $141 million into the firm around the time of the IPO.
The duo also has a strategic partnership that integrates Dropbox with Salesforce’s workflow tool, Quip.
Some analysts believe that Salesforce is a natural fit, as Dropbox’s document services would benefit the cloud giant’s existing client base.
Now, much of the speculation around these buyers happened back when DBX stock was sitting in the low $30s.
Following the lockup period, the stock slumped. Cheerleaders were saying in September that the stock had hit bottom.
But it wasn’t done falling.
Now, the good news is that if a stock price falls this far, someone is eyeing it up.
The 2018 decline of Dropbox stock reminds me of LinkedIn’s large drop after it missed earnings in June 2017.
We watched Microsoft swoop in and buy LinkedIn on a dip, and the business social media site is an incredible cash cow for the software giant.
Frustrated Dropbox shareholders would take a 60% buyout premium from today’s levels, especially with the ongoing uncertainty driven by broader macroeconomic and political trends.
Here’s How to Play Dropbox Right Now
Despite the decline below its IPO price, Wall Street is bullish on this beaten-down firm.
In the next 12 months, Piper Jaffray expects the DBX stock price to climb to $40 per share.
That’s a potential profit of 90.74%, putting us in range of a triple-digit profit.
I don’t think that the bleeding is over yet for Dropbox, but I am keeping my ear to the ground.
And what I keep seeing over the last year is the push from some of the street’s best bargain buyers lining up to buy shares at current levels.
By breaking an investment in Dropbox into three chunks, you’re setting up your portfolio for those potential triple-digit returns.
Buy one batch at today’s price levels.
Buy a second batch at $18.
And if it falls to $16, then buy your third chunk.
The market is volatile right now, but conditions are ripe for M&A activity.
If Dropbox continues to fall, expect a major investor will push for the sale of the company or a competitor will jump in to make an offer.
— Garrett Baldwin
Source: Money Morning