Cloud stocks are back, and with good reason.
Over the past six months, the First Trust Cloud Computing ETF (NASDAQ:SKYY) has rallied more than 20% to all-time highs amid signs that enterprises are re-accelerating spending on their cloud transformations. That is, a number of cloud computing service and parts providers have said that, after flat-lining for most of 2019, demand and spending in the cloud industry has come roaring back in late 2019 and early 2020 amid easing U.S.-China trade tensions and an improving economic environment.
That said, this should continue for the foreseeable future.
In 2020, U.S.-China trade tensions will continue to ease. Mostly because the U.S. doesn’t want to upset the applecart in an election year, while China can’t afford to do the same amid the coronavirus outbreak. Meanwhile, interest rates across the globe remain at or near record lows, and central banks everywhere are injecting further stimulus through asset purchases. Also, at the same time, global labor markets are healthy, consumers are confident and stocks are rising.
In other words, the economic environment in 2020 will be perfect for enterprises. There will be geopolitical stability, low spending costs, tons of liquidity and strong demand. Against that backdrop, enterprises will continue to re-accelerate spending on their cloud transformations.
And as they do, cloud stocks will move higher.
With that in mind, let’s take a look at five cloud stocks to buy for big gains in 2020.
Cloud Stocks to Buy for 2020: Splunk (SPLK)
Four things will push shares of big data analytics platform Splunk (NASDAQ:SPLK) to all-time highs in 2020.
First, sustained low rates will support Splunk’s extended valuation. Splunk is a big growth company with a promising future in big data capture and analysis. However, SPLK stock also features a very rich valuation.
In a high interest rate environment, that rich valuation would be a problem. But in a low interest rate environment, it’s not because low rates boost growth valuations by lowering the discount rate on future profits. Therefore, as long as Splunk keeps firing on all cylinders, the stock should go higher.
Second, enterprise software spending trends will accelerate in 2020. This acceleration creates a favorable backdrop for Splunk to continue growing its customer base and revenues at a robust pace.
Third, Splunk’s migration from a legacy license model, to a cloud-based business model through its Data-to-Everything platform will continue in 2020. As it does, the company’s pricing power and margins will improve — providing a tailwind for both revenue and profit growth.
Fourth, the commercial 5G boom in 2020 will spark exponential growth in the volume of data and data-generating devices in the world. In turn, this will spark exponential growth in enterprise demand for data analysis tools like Splunk. Making SPLK one of the top cloud stocks for potential investors to look at.
The Trade Desk (TTD)
Much like Splunk, four catalysts will push shares of programmatic advertising platform The Trade Desk (NASDAQ:TTD) to new highs in 2020.
The first reason is similar to Splunk’s top catalyst. The Trade Desk is a big growth company, with a big growth valuation. Therefore, low rates throughout 2020 will provide support for that extended valuation.
Second, digital ad spending trends will accelerate in 2020; Mostly because ad spending levels are tethered to economic strength. At the same time, U.S. digital ad spending will get a boost from the 2020 presidential election.
Third, digital ad real estate will expand significantly in 2020. This is because new cloud gaming and streaming TV platforms will launch and gain mainstream traction. For the most part, those platforms at least partially employ ads. Also, for the most part, those platforms are open to programmatic demand-side platforms (DSPs) like The Trade Desk. Consequently, The Trade Desk’s usage should rise in 2020 with the proliferation of new programmatic advertising opportunities.
Fourth, open internet initiatives will continue to gain traction in 2020. This will come as big tech giants like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) feel increasing pressure from regulators and consumers alike to break down their walled gardens. As that happens, The Trade Desk will have an opportunity to penetrate into those ad sales — which could provide a meaningful boost to the company’s top-line.
Alongside Splunk and The Trade Desk, identity access management (IAM) platform Okta (NASDAQ:OKTA) is another member of the cloud stocks that should rally to new highs in 2020.
The reasoning is fairly simple. Enterprise software spending trends will pick up in 2020. As companies spend more here, they will especially spend more on cloud security platforms because cloud transformation and cybersecurity are two of the top technology priorities for companies this year.
Furthermore, there has been and will continue to be exponential growth in the number of identities in an enterprise ecosystem, underscoring the necessity for new cloud security solutions to be IAM solutions.
In other words, 2020 is shaping up to be a big year for cloud IAM adoption — and Okta is the unparalleled leader in this market. In turn, as more companies turn to cloud IAM solutions in 2020, most of those companies will look to Okta.
With that, Okta’s revenues and profits will continue to march higher. As they do, OKTA stock will march higher, too, because low rates will provide support for the stock’s extended valuation. So, maybe now is the time to add Okta to your list of cloud stocks to buy.
A big pivot towards elevated spending on customer experience (CE) software will benefit cloud computing giant Adobe (NASDAQ:ADBE) dramatically in 2020.
We all know Adobe’s bread-and-butter is in the media world. This is where the company offers a plethora of best-in-class creative and document capture and editing solutions, which are trusted by individuals and enterprises of all shapes and sizes across the globe. This business is a very good one that runs at 80%-plus gross margins, with minimal competition and stable demand drivers.
However, the upside in ADBE stock in 2020 is all about the company’s ability to leverage its creative media solutions expertise, and create an equally robust CE software solution — which the company dubs the Experience Cloud.
Overall, CE is everything these days, as consumer-facing companies are finding it increasingly difficult to distinguish themselves in a crowded landscape, and as consumers increasingly value the experience attached to a service or product. So, if a consumer-facing company wants to succeed, they need to have a strong CE. What defines a strong CE? A lot of things. But, because consumers process and retain visual information far better than they do text information, almost all good CEs have strong visuals.
Who is the best in the world at making strong visuals? Adobe. Therefore, it only makes sense that as companies look to improve their CEs with strong visuals, they turn towards Adobe and their Experience Cloud to do so.
That said, this trend is just beginning. In 2020, it will gain serious momentum as enterprises increase their investment into CE. Adobe’s growth rates will move higher, profits will keep roaring higher and ADBE stock will soar to new highs above $350.
The bull thesis for Microsoft (NASDAQ:MSFT) stock in 2020 is fairly straightforward.
For a long time, the ultra-valuable and massive public cloud infrastructure market has been a two horse race between Amazon (NASDAQ:AMZN) and Microsoft — with the former being the clear number one, as Amazon Web Services controlled about 50% of the market in 2017.
However, Microsoft has been gradually chipping away at Amazon’s dominance for several years now. And, in 2019, they landed a huge Pentagon contract win over Amazon, in a move that signaled maybe it’s time for Microsoft to become the new number one player in the cloud infrastructure market.
The Pentagon contract was widely watched by everyone in the industry. Therefore, everyone in the industry knows that one of the world’s most trusted organizations picked Microsoft over Amazon for cloud infrastructure services. Does that make Microsoft better than Amazon? No. But, does it make Microsoft better than Amazon is the eyes of the pubic? To a lot of enterprises, yes.
This public sentiment shift will enable Microsoft to win over more contracts in 2020. This, in turn, will accelerate its cloud growth narrative — especially against the backdrop of rising cloud spending trends.
History shows that as goes Microsoft’s cloud business, so goes Microsoft stock. So, as Microsoft’s cloud business roars higher in 2020, Microsoft stock should follow suit. This makes it just another part of the cloud stocks to consider for the future.
As of this writing, Luke Lango was long TTD, FB, and ADBE.