By now, you’ve seen the headlines. The big 2019 stock market rally is finally starting to show cracks, posting its biggest two day drop since early January. The culprit? Trade war tensions have re-escalated. Ahead of trade discussions in Washington D.C. between the U.S. and China, Donald Trump has upped the ante of those discussions by promising a big tariff hike by Friday if no deal is struck.
Markets are freaking out in response. But the selloff is dragging down every stock, even those stocks which have relatively mitigated exposure to China, international trade and tariffs. Those stocks — the ones that are selling off big right now despite not being related to investor concerns — are the ones investors should consider buying on weakness.
Of those stocks, perhaps the best ones to buy are high-flying cloud stocks. These stocks have been red hot for a long time, are supported by secular growth trends, and have mitigated exposure to anything trade war related. Despite all that, cloud stocks are dropping on rising trade war concerns. Broadly, then, now looks like a great time to buy secular growth cloud stocks on unrelated trade war weakness.
With that in mind, let’s take a look a seven cloud stocks investors should consider buying on May weakness.
When it comes to enterprise cloud giant ServiceNow (NYSE:NOW), it’s all about digital workflows.
What exactly does that mean? It essentially means that automation is coming to the workplace. As technology advances and more and more things become automated, enterprises are increasingly adopting and deploying these automated technologies across their enterprise to “make work, work for you”. The best in class solutions in the digital workflow market pretty much all come from ServiceNow.
Right now, ServiceNow is just scratching the surface of its long-term growth potential in the digital workflow and automation markets. As these markets advance and mature over the next several years, ServiceNow will grow by leaps and bounds, and NOW stock will surge higher.
Perhaps the most well known cloud stock is Salesforce (NASDAQ:CRM), and with good reason.
Salesforce has essentially created a best-in-class, cloud-hosted universal business help platform with a multitude of enterprise solutions than span from marketing to sales. All of these solutions are data-driven, and as such, their usefulness is only improving as the volume of data globally explodes higher.
As it does, more and more companies will pivot to the Salesforce cloud. This will keep growth rates high, allow margins to move higher, power robust profit growth, and lead to big gains in CRM stock.
One explosive cloud stock that looks particularly attractive on recent weakness is Okta (NASDAQ:OKTA).
The story at Okta is pretty simple. Data privacy and personal security are huge problems right now. Okta is creating an enterprise cloud solution which focuses on solving that problem. Broadly, Okta is creating the identity cloud, which essentially allows millions of people across a corporate ecosystem to seamlessly, securely, and uniformly connect to the technological tools that the corporation is adopting. This is a very important job. Corporations are adopting more technological tools and software systems than ever before. Most of those systems have access to personal data. That means that there’s a lot of personal data risk at the office. Okta mitigates that risk by creating a solution which protects data from the onset.
The opportunity here is huge, and Okta is still relatively small company still growing very quickly. As such, there’s a lot of runway here for Okta to grow, and as it travels along that runway, the stock will fly higher.
Another high-flying cloud stock that looks particularly good on recent weakness is Adobe (NASDAQ:ADBE).
There are three big cloud stories at Adobe. First, you have the Document Cloud, which is essentially where Adobe offers digital document editing solutions. This is a secular growth business, since corporations are increasingly using digital documents as opposed to physical ones.
Second, you have the Creative Cloud, which is where Adobe offers creative professionals tools for photo, image, and video creation and editing. This, too, is a secular growth business, since the world is becoming more visual-oriented than ever before.
Third, you have the Experience Cloud, which is where Adobe leverages it’s photo-editing leadership to deliver enterprise-level cloud solutions focused on the customer experience. Again, this is a secular growth business, because as the consumer grows more visual-oriented, enterprise marketing campaigns will become more visual, too.
Overall, Adobe is supported by three secular growth cloud businesses. Ultimately, that means that this company will remain a big grower for a lot longer, and that ADBE stock will remain a big winner for a lot longer.
When it comes to e-commerce solutions provider Shopify (NYSE:SHOP), the long term bull thesis boils down to three words: decentralized direct retail.
Broadly, the whole retail world is pivoting to direct, which basically just means that technology has enabled sellers to reach buyers directly through the internet. Further, that direct retail world is becoming increasingly decentralized, as technology has simultaneously enabled any seller to reach any buyer through the internet. This produces optimal outcomes for consumers, since there’s more sellers, which leads to lower prices and higher customer convenience. As such, decentralized direct retail is the future of retail.
Shopify is the backbone of the decentralized direct retail model. The company provides solutions which enable sellers of all shapes and sizes to be successful in this new retail world, and they are the best in the world at doing so. Consequently, as the decentralized direct retail model gains traction over the next several years, Shopify will gain merchants, revenues will run higher, profits will soar, and the stock will make new highs.
One high-flying cloud stock that has been unreasonably beaten up recently amid largely unrelated trade war concerns is cloud communications app maker Twilio (NYSE:TWLO).
The big idea here is that, because we live in an era of unprecedented internet connectivity, brands are increasingly trying to take advantage of that and directly connect with consumers. Think about when Lyft or Uber sends you a message that your ride is close. This market is broadly called the Communication Platforms-as-a-Service (CPaaS) market, and Twilio has emerged as the go-to company for CPaaS solutions.
This market is in the first inning of a multi-year growth narrative. The CPaaS market is currently pretty small. But, competitive dynamics will ultimately make direct communication the norm. After all, if Company A’s competitor is leveraging direct communication to enhance the consumer experience, then Company A has to naturally adopt direct communication, too. That’s largely why research firm IDC expects this market to grow five fold over the next five years.
As that market does grow by five fold, Twilio will grow by leaps and bounds. This robust growth will keep TWLO stock on a long-term winning trajectory.
To be sure, the weakness in GOOG stock is mostly due to company-specific issues and not macro headwinds. The company reported ugly quarterly numbers recently which broadly showed that the digital-ad business is slowing. Considering the digital ad business makes up the lion’s share of Alphabet’s revenues and profits, GOOG stock dropped big in response to digital ad slowdown concerns.
But, the digital-ad business isn’t the future of Alphabet. Instead, the future is Google Cloud and Waymo. Both of those businesses are gaining momentum. With respect to Google Cloud, as retail competition heats up, Google Cloud should start to win over clients from Amazon Web Services. Meanwhile, on the self-driving front, Lyft is going to start using Waymo cars for a beta robo-taxi service soon.
Broadly, the growth narrative supporting GOOG stock remains healthy, meaning that recent weakness in the stock is a buying opportunity for long term investors.
As of this writing, Luke Lango was long NOW, CRM, OKTA, ADBE, SHOP, TWLO, and GOOG.