The novel coronavirus pandemic has triggered several changes in the way people communicate, socialize and work. Some of these changes are likely to be the new normal even after the pandemic is over.
As an example, remote work is likely to be the trend in the coming years. According to a study by Gallup, 62% of Americans have worked from home during the crisis. Importantly, a study by International Business Machines (NYSE:IBM) indicates that 61% of respondents would like remote work to be their primary way of working in the future.
One technology that has ensured business continuity even with remote work is the cloud storage or the cloud network. Needless to say, cloud service providers are playing an important role in this new normal. To put things into perspective, by fiscal year 2021, cloud data centers will process 94% of the workload.
Given the demand outlook, companies providing cloud services are attractive from an investment perspective. This column will focus on four cloud stocks to buy. The companies to be discussed are also witnessing strong growth in their cloud business. This growth is likely to sustain, making the stocks attractive for long-term exposure.
Let’s look at the following cloud stocks to buy:
- Amazon.com (NASDAQ:AMZN)
- Alibaba Group (NYSE:BABA)
- Microsoft (NASDAQ:MSFT)
- Salesforce.com (NYSE:CRM)
Cloud Stocks to Buy: Amazon (AMZN)
Amazon Web Services is the top cloud service provider and a key beneficiary of sustained growth in the cloud business. AWS solutions are already being provided for remote employees, students and contact center agents. Therefore, there is a big addressable market and the results are likely to show in the form of strong growth in AWS business.
Its worth noting that Zoom Video (NASDAQ:ZM) recently reported second-quarter results for 2020. The company quadrupled its revenue with profits surging 10-folds. Zoom has been utilizing AWS for hosting a significant portion of its network. This is an example of the likely growth AWS can experience as partners witness surge in business.
From a revenue perspective, AWS has already surpassed $10 billion in quarterly revenue. This implies an annual revenue of $40 billion. Even if the cloud business grows at 25% over the next five years, the segment will generate $120 billion in annual revenue. Clearly, the business is likely to be another cash flow machine for Amazon.
This makes AMZN stock among the top cloud stocks to buy with a long-term view. The stock has moved higher by 82% for year-to-date FY 2020. Any correction would be a good accumulation opportunity.
Alibaba Group (BABA)
Back in FY 2018, Alibaba CEO Daniel Zhang opined that “every business in the future will be powered by cloud.” The CEO’s vision was that cloud computing will be the main business for Alibaba in the future.
Almost two years down the line, Alibaba is already the largest cloud computing provider in Asia Pacific. Given the current opportunity, the company has pledged to spend $28 billion on cloud computing over the next three years.
In June 2020, the company also announced plans to hire 5,000 workers as demand for cloud services grows. The company is already helping business and individuals to pursue remote work with the help of its cloud infrastructure.
With cloud computing already delivering robust top-line growth, I am bullish on BABA stock for the coming years. Its also worth noting that for the most recent quarter, the company reported EBITDA loss of $48 million from the cloud business. EBITDA loss has significantly narrowed and I expect the business to be a key cash flow driver in the next five years.
Alibaba’s core commerce business is already a cash-flow machine and the cloud computing business will further increase free cash flows. Considering this factor, BABA stock is certainly worth holding.
Microsoft (MSFT)
When it comes to global market share, Microsoft Azure is just behind Amazon Web Services. Microsoft is therefore well positioned to benefit from the business growth driven by the work-from-home trend.
MSFT stock has also been in an uptrend and any correction will provide an opportunity to accumulate for the long-term.
Microsoft Azure has already been providing single sign-on where employees of any organization can access resources from any device while working remotely. The services include protection for remote devices and multi-factor authentication.
From a cloud business growth perspective, I want to add that Microsoft was recently reaffirmed as the JEDI cloud contract winner. The government contract is worth $10 billion over a period of 10 years.
This is important as it underscores the level of security provided by Microsoft Azure. Furthermore, this contract should pave the way for more government and non-government contracts.
Overall, Microsoft has a strong global reach and Azure is likely to support several businesses in remote work for the years to come. I am therefore bullish on MSFT stock.
Salesforce.com (CRM)
CRM stock has seen positive momentum in the recent past. The stock has trended higher by 45% in the last six months. One of the reasons is the company’s strong positioning in the PaaS landscape.
Recently, the company launched Salesforce Anywhere. With this application, organizations can sell, service, market and collaborate for anywhere. Sales and marketing team can also “stay in sync with real-time alerts and AI-driven prompts to take action.”
In June 2020, the company also launched “Government Cloud Plus.” The cloud infrastructure is specifically isolated for U.S. federal, state and local government customers, U.S. government contractors, and federally funded research and development centers. The JEDI cloud contract for Microsoft provides an insight on the potential for revenue from the government sector.
Overall, CRM stock is worth accumulating on any correction and I expect the company to deliver strong numbers in the coming quarters.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
