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5 Cloud Stocks Still Reaching for the Sky, Despite the Pullback

Even when factoring in the recent correction in the tech sector, there's good reason to keep an eye on these five top cloud stocks

cloud Stocks - 5 Cloud Stocks Still Reaching for the Sky, Despite the Pullback

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It’s safe to say 2020 has been a banner year for cloud stocks. With the novel coronavirus pandemic being more of a tailwind than a headwind, names in this space have dominated the market as of late. But, with the recent selloff in big tech names, is the party over?

It depends. On one hand, until there’s a vaccine, chances are today’s “new normal” will continue. That means a strong environment for the cloud industry to thrive, via the “stay at home economy.” But, that’s not all! As I wrote back in the midst of the lockdowns, there’s ample reason why remote work trends, which bode well for the cloud space, are here to stay, even after the pandemic.

On the other hand, these factors could be already factored into cloud stocks. All the names listed here trade at premium valuations, and could see more contraction as investors take profit.

So, what’s the play here? Despite concerns about valuation, there’s still opportunity to dive into these names. Especially with the recent dip.

In a field of winners, these five cloud stocks are some of the best opportunities out there:

  • Amazon (NASDAQ:AMZN)
  • Alibaba (NYSE:BABA)
  • CrowdStrike (NASDAQ:CRWD)
  • Docusign (NASDAQ:DOCU)
  • Microsoft (NASDAQ:MSFT)

Let’s take a closer look at what makes each of these strong stocks to buy now.

Cloud Stocks: Amazon (AMZN)

Cloud Stocks: AMZN stock
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When you think “pandemic tailwinds” and Amazon, the first thing that comes to mind is probably e-commerce. But, besides boosting the company’s most well-known business, the pandemic has boosted its Amazon Web Services (AWS) unit as well.

With this in mind, it’s no surprise AMZN stock has performed so well this year. Shares are up 68.6% year-to-date, and more than 90% off their March pandemic selloff lows. Yet, with multiple tailwinds in motion, can success continue for the e-commerce and cloud powerhouse?

Certainly. But, valuation today may have gotten ahead of itself. Amazon stock changes hands at a forward price-to-earnings ratio of 98x. Sure, with the company’s earnings projected to grow nearly 39% between this year and the next, a premium multiple is warranted.

However, that may not make the stock immune to multiple contraction. Yes, with its growth rate ahead of FAANG peers like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB), there will still be a premium. Yet, with shares trading for 70.7 times fiscal 2021 (ending Dec 2021) earnings, a contraction to 50x FY21 could mean continued downside from here.

That being said, an additional selloff may mean a solid long-term entry point is just around the corner. With the underlying factors still in its favor, keep Amazon on your radar.

Alibaba (BABA)

BABA Stock
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When the coronavirus first hit China, it looked like tough times ahead for Alibaba. But, just like Amazon here in America, what’s been a headwind for most (the pandemic) has been a tailwind for this e-commerce and cloud powerhouse.

Just like its stateside equivalent, BABA stock is up significantly since March’s coronavirus crash.

Yet, comparing their respective cloud businesses isn’t exactly apples-to-apples. As our own Alex Sirois wrote Sept. 10, while AWS is a profit center for Amazon, this company’s cloud business is currently a drag.

That’s not to say the cloud can’t be a catalyst for BABA stock. As this commentator wrote, the company’s cloud-computing platform still offers the potential for “high octane growth.” In other words, fuel to send BABA stock even higher in the coming years.

Also, valuation-wise, Alibaba shares look cheap relative to other cloud and big-tech dynamos. Sure, some of this has to do with the ongoing U.S.-China trade tensions. Yet, for those looking for a long-term exposure to cloud megatrend, this remains one of the best options out there.

CrowdStrike (CRWD)

Cloud Stocks: CRWD stock
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After covering more general cloud plays, lets take a look at this cloud cybersecurity play. CrowdStrike is another name that has seen a boost in its business due to the pandemic. How so? With millions of office workers logging in remotely due to social distancing, cybersecurity has been a top concern in corporate America.

But, this company’s cloud-based platform provides piece of mind as remote working skyrockets. As a result, sales jumped 84% from the prior year’s quarter. Yet, after rallying 153% so far this year, is it to late to dive into shares?

Yes and no. One one hand, there’s good reason why the recent pullback in CRWD stock could continue. As InvestorPlace’s William White wrote Sept. 4, insider selling drove shares lower earlier this month. This could be a sign that the company’s C-suite sees shares have run up too far, too fast and are taking profit accordingly.

On the other hand, trends remain good friends with CrowdStrike. Between the existing demand for the latest and greatest in corporate cybersecurity, and the acceleration of remote work, even after the pandemic, the growth trains remains in motion.

However, just like with Amazon, valuation contraction is a risk to consider. Shares today trade for nearly 2000x fiscal 2021 (ending Jan 2021) earnings, and more than 500x fiscal 2022 (ending January 2022) earnings.

In short, there’s some good reasons to keep this name on your radar, but maybe take a wait-and-see approach for now. You may find a stronger entry point down the road. Regardless, this is one of those cloud stocks that clearly belongs on your radar.

DocuSign (DOCU)

DOCU stock
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CrowdStrike hasn’t been the only cloud name generating triple-digit returns due to the “stay-at-home economy.” Docusign is another name benefiting tremendously from the sudden rise in remote workplaces.

A provider of cloud-based e-signature solutions, calling remote working and “social distancing” a tailwind for this company is an understatement. And, with shares more than tripling off their March lows, and sales up 45% from the prior year’s quarter, the proof is in the pudding.

But, have investors gotten ahead of themselves piling into DOCU stock? Definitely. With a forward P/E well into triple-digits (343.8x), “priced for perfection” is an understatement as well.

And valuation concerns are namely the reason why the stock has sold off so far this month. Reaching prices topping 290.23 per share on Sept. 1, shares change hands today around $197.40 per share. But, after a nearly 32% pullback, is today the time to buy the dip?

It may pay to take your time. With investors taking profit after the stock’s epic run this summer, buying today’s pullback could be like catching a falling knife. Granted, the five cloud stocks discussed here all face the risk of a continued pullback. But, this name especially has plenty more room to head lower in the coming months.

Just like with “too hot to touch” CrowdStrike, take a “wait-and-see” approach with DOCU stock.

Microsoft (MSFT)

Cloud Stocks: MSFT stock
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The past few years have been all about the cloud for Microsoft. MSFT stock may have taken a back seat to FAANG stocks during most of the 2010s. But, starting in 2019, this “old hat” software giant came back, with a vengeance.

Even before the pandemic, the company’s cloud catalysts had sent shares up significantly from prior price levels. But, with the pandemic fueling demand for its Azure, Office 365, and Teams platforms, shares have knocked it out of the park since March.

But now, after the recent double-digit pullback off its recent highs, is MSFT stock a buy at around $203.50 per share? All bets are off. Yes, the growth train continues for its cloud business. But, today’s valuation may be too rich. Even when factoring in analyst consensus for double-digit earnings growth between this year and the next.

That being said, with its strong balance sheet and high cash flow, this remains a high quality stock to own. Tread carefully, but Microsoft shares remain one of the best cloud plays out there.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/5-cloud-stocks-reaching-sky-despite-pullback/.

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