Could European Privacy Be A New Opportunity For IBM?

| About: International Business (IBM)

Summary

European privacy demands are a financial event, not a political one.

Requirements for local data centers benefits standards-based approaches.

In the near term, IBM is well-positioned.

Europe's "privacy watchdogs" are once again hitting up U.S. tech companies like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) on the question of controlling international data flows in the wake of the Snowden regulations.

While the EU claims this is about privacy, its impact is entirely financial. While the impact has mostly passed, there is one U.S. stock that could still benefit.

Gigaom nailed it almost two years ago, talking about a "Snowden effect" that made Salesforce.Com (NYSE:CRM) create a new data center presence in France, along with separate centers in Germany and the UK. IBM's (NYSE:IBM) Softlayer unit now has five data centers, one in each major European capital.Companies like VC-backed Cloudflare and privately-held Interroute, based in the UK, derive huge benefits moving this data wherever national governments demand.

Not all cloud providers are as geographically redundant as they may need to be, especially if Brexit results in a European Union collapse. Amazon.com (NASDAQ:AMZN), for instance, is only now building its third European center, near London, to go along with centers in France and Germany. Alphabet has four European data centers, none of them in major European capitals.

While European companies benefit in the near term from all this, I think the long-term beneficiary will be standards. As companies find they need to follow local rules in housing data they demand standards for the resulting data centers, pushing cloud providers to accommodate and, ironically, making that business even more commodity-oriented.

The near term may be the last best hope of IBM to gain cloud market share, by following the rules closely, auditing compliance, and providing security. If Softlayer can make the new rules work to its benefit, that stock may finally start getting out of first gear.

Cloudflare (Private:FLARE) looks like the big prize. Its plan was to go public next year, valued at $7-8 billion, but unicorn valuations have it cutting that and the costs of going public may cause it to cash-out the way Blue Coat did, getting bought by Symantec (NASDAQ:SYMC).

Once the smoke clears on both Brexit and the EU's demands, then, I would expect a new round of mergers and acquisitions across the continent, with the cloud majors positioning themselves to deal with whatever regulators may demand, on behalf of customers.

So for all those claiming I hate IBM, I don't. The shares are up 12% on the year - more than Amazon, even more than Google - and it's this growing complexity in the business environment that is behind it. It may have even further to run, given its Apple-like multiple.

Especially if it can make a deal for Cloudflare.

Disclosure: I am/we are long AMZN, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.