If you wanted to make money in 2020, the easiest way was to buy the cloud.
It’s worked for me. Much of my profit over the last year have from the “Cloud Czars,” five companies whose cloud computing data centers define the global economy. After all, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon (NASDSAQ:AMZN) and Facebook (NASDAQ:FB) are the most valuable companies in the world.
Reaching such rarefied heights wasn’t easy. It took some risky moves: Facebook spent incredible sums of money before segment revenues could justify the price tags, to name just one example.
AT&T (NYSE:T) and IBM (NYSE:IBM) passed on the $1 billion/quarter entry fee, and their shareholders have now paid a terrible price. The Cloud Czars now spend about $4 billion in capital expenditure each quarter to expand and maintain their market share.
The sixth most valuable company in the world is China’s leading Cloud Emperor, Alibaba (NYSE:BABA). You could also buy Chinese clouds through Tencent Group Holding (OTCMKTS:TCEHY), owners of WeChat, or Baidu (NASDAQ:BIDU), which runs that country’s largest search engine.
But these aren’t the only ways to profit from the cloud trend. You can buy into big application providers, like Netflix (NASDAQ:NFLX) and Salesforce (NYSE:CRM), whose rentals of cloud resources let them scale to global dominance. You can buy cloud center hardware or software providers.
Here are just 7 cloud stocks I have covered recently:
- Alibaba (NYSE:BABA)
- Alphabet (NYSE:GOOG)
- Amazon (NASDAQ:AMZN)
- Facebook (NASDAQ:FB)
- Salesforce (NYSE:CRM)
- Palo Alto Networks (NYSE:PANW)
- Workday (NASDAQ:WDAY)
The market remains somewhat volatile, but day trading aside, secular macrotrends will sustain this sector higher.
Alibaba (BABA): China’s Cloud Emperor
The Trump Administration doesn’t want you to invest in Alibaba (NYSE:BABA). However those who have made serious money in 2020: Alibaba shares are up 37% year-to-date.
BABA stock opened for trade August 27 around $289 per share, trading at 85 times last year’s earnings for a total market cap of $783 billion. Shares are now supported by a listing in Hong Kong that gives Alibaba easier access to Chinese investment capital.
Shares are also supported by the coming IPO of Ant Financial; Alibaba owns one-third of the company. Those shares will be listed in Shanghai and Hong Kong. Ant made $1.3 billion during the pandemic quarter ending in March. The IPO has an estimated value of $225 billion.
In Alibaba’s June quarter report, released August 20, revenue was up 34% year over year and profits more than doubled. About 30% of the company’s $21.76 billion of revenue hit the net income line.
While most of that revenue came from merchandise sales, Alibaba doesn’t hold merchandise. Rather, suppliers take on that risk. That, along with its cloud computing and Ant Financial units, mean its profit margins are closer to those of Facebook (NASDAQ:FB) than Amazon (NASDAQ:AMZN).
Alibaba has more powerful cloud capacity than any U.S. counterpart. The company does accounting and business management like Microsoft (NASDAQ:MSFT). It handles financial transactions like Visa (NYSE:V). It also offers digital content services like Amazon, including gaming.
While America’s Cloud Czars are under antitrust threat from politicians in both parties, China has given its Cloud Emperors a green light. That’s why Susquehanna Research recently raised its price target on Alibaba to $350, 21% ahead of its current price.
Alphabet (GOOG): Is Google Overpriced?
If Alphabet (NASDAQ:GOOGL), the parent company of Google, is overpriced, then the whole market is. The company’s market cap recently blew past $1 trillion, for the second time this year. Its price to earnings multiple is more than 35, compared to a NASDAQ average of 22.
The reason is the cloud, which Google helped develop in the 2000s. Cloud computing applications have transformed our lives over the last decade. This change has accelerated over the last several months.
But Google, which once had the informal corporate slogan “Don’t Be Evil,” is viewed with increasing suspicion by Western policymakers.
Google’s $2.1 billion acquisition of Fitbit (NYSE:FIT), a fitness band company that was going nowhere, has yet to be approved. Google has promised not to use Fitbit data in marketing, but Fitbit shares have not joined Google’s rise this year. Before Google announced its latest concession to regulators in an effort to get the merger done, Fitbit was down on the year.
Yet there are bigger problems. Google’s dominance in search ads is said to be the “top priority” of U.S. antitrust cops. States are focused on Google’s advertising business, while the Justice Department looks at its dominance in search.
Chamath Palihapitiya, a former Facebook executive whose Social Capital fund has been a big winner on Tesla (NASDAQ:TSLA), has been building a Google bear case. That case is based on Google’s status as an “incumbent,” and the growing difficulty of goosing earnings with acquisitions. Regulation, taxation and the brittleness that drove down Microsoft early in the century are all real risks, he writes.
But American critics forget that Google is a global business. American and even European laws are local ordinances. The company has $120 billion in cash to deploy and dominates in global mobility with Android. It’s the default search engine for Apple (NASDAQ:AAPL) as well.
Every king’s crown hangs heavy, and Google’s is no exception. In just 23 years, it has gone from start-up to global dominance. Critics see the power of its opponents. Investors should be aware of its own growing power, political as well as financial.
If I were investing with a 10-year time horizon, I wouldn’t fear Google stock. Everything is overpriced right now. With the Chinese as the alternative, the Cloud Czars won’t be taken down.
Amazon (AMZN): Overbought and Overvalued
By any conventional measure Amazon (NASDAQ:AMZN) is overvalued.
With a market cap of $1.64 trillion, Amazon is worth more than four times its potential 2020 revenue of $400 billion. That’s based on second quarter sales of $101 billion.
It’s not unusual to value a tech company at 10 times its sales or even more. But Amazon isn’t really a tech company. As I have written many times before, Amazon is an infrastructure company. About 80% of its sales come from retailing, usually valued at a discount to revenue.
Even granting that Amazon is taking full value from its sales, the costs of warehousing and delivery mean margins are slim; just 3.5% in North America for the first half of 2020. Valuing Amazon Web Services at even 20 times sales, or $800 billion, still leaves $850 billion in equity covering $320 billion in retail revenue.
Despite these facts, analysts are pounding the table for Amazon in a way they almost never do. There are now 39 analysts following AMZN, according to Tipranks, and 38 of them are screaming buy. The average one-year price target of $3,725 represents a gain of 13% from its $3,300 opening price on August 24. The big second quarter numbers caused 27 analysts to raise their price targets by the start of August.
Needham analyst Laura Martin recently said Amazon could be worth $5,000 per share over the long term. Martin’s bull case is based on the idea that it’s worth more together than broken up. But a break-up is what Senator Elizabeth Warren and NYU professor Scott Galloway, among others, are calling for.
Even without a break-up, regulation is coming. And regulation always comes with a price tag for the regulated. Amazon’s current price is built on the COVID-19 market and the wide-ranging actions of the Fed. The price isn’t based on Amazon’s performance, or any other kind of fundamentals.
There’s so much money floating around, and stocks are so liquid, it’s no surprise cash is floating into these stocks. But liquidity works both ways. Easy money flowing in can quickly become profit-taking that snowballs into a “dip” and finally a “rout” before small investors can respond. That’s what happened to the whole market in March.
The pandemic’s end will make other things look cheap. Failure to stop the pandemic will make the economic damage too obvious to ignore. Either way, Amazon stock will eventually reflect its fundamental value.
Fortunately, those fundamentals are great.
Facebook (FB): How the World Communicates
There is an assumption is that Facebook (NASDAQ:FB) is an American media company built on advertising. That would make it vulnerable to a boycott by American advertisers upset that it still lets the President’s supporters make full use of the service.
But Facebook is not a media company. It’s not even American anymore. Only 10% of its monthly active users are in the U.S. or Canada: 41% are in Asia. India is in fact Facebook’s largest market.
That means Facebook must navigate between rulers and ruled everywhere it does business and hew to one policy everywhere. How might Indian President Modi react if Facebook decides to exile his supporters because their content wasn’t trustworthy? How might dozens of African dictators, whose people have become equally dependent upon Facebook, react to the company taking a political stance?
Of the 10 largest social networks, based on number of global users, Facebook owns 4 – Facebook itself, Facebook Messenger, Whatsapp and Instagram. Facebook’s services are now integral to the global economy, not least because they’re free. In countries like India, where the median annual income was just $616 in 2019, that’s important.
Further, Facebook owns its own cloud, meaning it can deliver services like shopping or banking with instant credibility. Services like banking and shopping aren’t dependent on advertising, so the global pandemic offers a unique opportunity to launch these products.
CEO and co-founder Mark Zuckerberg has deliberately repositioned Facebook as a global communications company. Companies like AT&T (NYSE:T), which held this position in the past, cast themselves as common carriers. They were required to provide service regardless of content, while complying with government orders on things like wiretaps.
In 1990, communications meant voice. Today, it means anything that can be digitized. In 1990, most communication was two-way. Today anything can be broadcast, and often is.
This makes Facebook far more powerful than AT&T was and, because of its global footprint, far more vulnerable. If Facebook defies Trump, might it defy Modi? If Facebook pays Rupert Murdoch for news in Australia, how long before it’s paying him in the U.K., or the U.S.?
This is the risk in Facebook stock. Zuckerberg faces a challenge in navigating between politicians and their people, not just in America but abroad as well. And he faces the additional hurdle of creating services that can ride on more than ad revenue. But its cloud gives Facebook the scale and power to meet both these challenges.
Palo Alto Networks (PANW): The Cloud Security Leader
You don’t have to just buy cloud computing. You can buy services the cloud depend on.
One of those services is security. Right now Palo Alto Networks (NASDAQ:PANW) looks like the winner in the cloud security segment.
Of course, a call like this is always tentative. New algorithms, concepts and threats can overturn a market lead overnight. But right now, the momentum is on Palo Alto’s side and investors are buying the stock.
On August 26, Palo Alto stood at $262 per share. That’s a market cap of $25.2 billion for a company that just reported sales of $3.4 billion, for the year ending in July.
Palo Alto’s software is described as a “next generation firewall.” Unlike older products that protect the perimeter of the network, Palo Alto creates IDs around apps, content, users and devices, both inside and outside the network. That means it can protect not just internal resources but Software delivered as a Service (SaaS). It’s a concept called Secure Access Service Edge (SASE). There’s zero trust and continuous monitoring of applications and data, minimizing risk.
The approach makes Palo Alto a “work from home winner.” It’s driving growth of 20% per year in revenue, which CEO Nikesh Arora believes is sustainable. The Gartner (NYSE:IT) “magic quadrant” has Palo Alto in the upper-right leader position for next-generation firewalls.
Arora is also part of Palo Alto’s secret sauce. He was once seen as heir apparent to Masayoshi Son at Softbank (OTCMKTS:SFTBY). His key years were spent at Alphabet, where Eric Schmidt called him “the finest analytical businessman” he had ever met.
Arora’s latest splash is the Crypsis Group, a digital forensics outfit Palo Alto is buying for $265 million. While Palo Alto’s software can predict and prevent most attacks, Crypsis can mitigate the effects of successful attacks, and that knowledge can then be fed back to Palo Alto products.
Palo Alto is also turning its security orchestration system into a marketplace, with add-on packs that turn its customers into re-sellers. Knowing that you don’t know it all is the key to wisdom.
Palo Alto had nearly $3 billion in cash on hand at the end of July and seems to have the right approach for the current computing environment. If you’re buying computer security stocks, Palo Alto is your best bet right now.
Salesforce (CRM): Welcome to the Dow
The success of the cloud in 2020 can be summed up in just one fact: in August Salesforce (NYSE:CRM), a 20-year old cloud-based software provider, was added to the Dow 30, replacing Exxon Mobil (NYSE:XOM) .
Salesforce was founded to sell applications based on Oracle (NASDAQ:ORCL) database software as a service. Salesforce passed Oracle in market cap in July, and is now almost $20 billion ahead.
Salesforce usually beats earnings estimates. It did so again during the most recent quarter, sending the shares still higher. Analysts were expecting earnings of 67 cents per share, hoping for 69, on revenue of $4.9 billion. They got blowout earnings of $2.85 per share on revenue of $5.15 billion.
Salesforce was born before the cloud. But it has alliances with Amazon, Microsoft’s Azure, and Alphabet’s Google Cloud. Alongside with 9 data centers Salesforce manages on its own, this offers redundant copies of the application from all major business centers, meaning increased system stability and security.
The Dow announcement puts more lift under Salesforce shares. Funds that track the average will now have to buy and hold Salesforce stock.
This is all ironic because Salesforce CEO Marc Benioff famously said “capitalism is dead” at the Davos conference this year. What he really meant was companies must honor employees, customers and the environment, not just shareholders.
Salesforce has long been an analyst favorite. The stock has risen an average of 40% each year for the past five years, almost 700% over the last 10. It’s a buy-and-hold stock. Right now 21 of 25 analysts on Tipranks say buy Salesforce.
Workday (WDAY): Everything New Becomes Prosaic
When it comes to the cloud investors are always chasing the next shiny object. A niche that seems earth-shaking when it opens will, once it’s mined, seem prosaic and staid.
That’s the story of Workday (NASDAQ:WDAY). It has proven the value of its niche, human resource databases in the cloud, and expanded it into finance and enterprise management.
Much as Salesforce began with a disgruntled Oracle salesman, Workday began life with people upset over an Oracle acquisition.
In this case it was Peoplesoft, which Oracle bought in 2005 in a hostile takeover. Two Peoplesoft veterans decided to launch a competitor utilizing the cloud and Workday was born. The company’s 2012 IPO valued it at $9.5 billion. It has more than quadrupled its value since.
Workday has copied a lot of the things Salesforce did right. It has a partner ecosystem selling their improvements to its software, and has cultivated a reputation as a great place to work. While other companies cut pay at the start of the pandemic, Workday handed out bonuses. It has also laterally expanded its market niche. What started as a “human resources” company is now a “business development manager,” with financial management applications.
The problem for Workday is that success breeds expectations of even more success. At some point every company will fall short, and expectations will ratchet downward.
Workday remains in a market niche that’s still growing, a niche where analysts at Gartner (NYSE:IT) says WDAY is the leader. Workday’s software keeps improving, marked by a cut in the time it takes to deploy.
When speculators run to the shiny objects, they leave great businesses alone. That’s what seems to be happening here. Over the last five years Workday has averaged a 50% gain each year. The fact that it’s lagging now may spell opportunity for patient investors.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, AMZN, AAPL, and MSFT.