For the coming decade, the cloud computing industry and related cloud stocks are likely to be among the biggest investment themes.
To put things into perspective, between the current year and fiscal year 2025, the industry is expected to grow at a compound annual growth rate of 17.5%. Another research pegs industry growth at a CAGR of 16.4% over the next seven years.
Therefore, leading companies in the cloud business can witness earnings growth of 15% to 20% in the next decade. It therefore makes sense to have one or more cloud stocks in the long-term portfolio.
These four cloud stocks have been on a high growth trajectory. A correction in these stocks would be a good opportunity to accumulate for the medium to long term.
Let’s look at the following cloud stocks that are an integral part of this growth story.
Cloud Stocks to Buy: Snowflake (SNOW)
SNOW stock got listed in a recent initial public offering. After trading at highs of $319, the stock has corrected to $238. I believe that this pullback is a good opportunity to consider accumulating the stock.
According to the company, the addressable market for its cloud data platform is $81 billion in the current year. For the last quarter, the company reported revenue of $133 million, which implied a year-on-year growth of 121%. The annualized revenue is therefore in the range of $500 to $600 million.
Even if the company gains 5% market share based on its estimate on the addressable market, the revenue potential is $4 billion. Furthermore, the cloud data platform market will expand in the coming years. Clearly, the company’s high revenue growth trajectory is likely to sustain and this makes SNOW stock attractive.
In terms of differentiating factor, the company’s CEO Frank Slootman believes that “one of the key distinguishing architectural aspects of Snowflake is that once you’re on our platform, it’s extremely easy to exchange data with other Snowflake users. That’s one of the key architectural underpinnings.”
Alibaba Group (BABA)
BABA stock has been steadily trending higher as the company stands to benefit from two factors.
First, e-commerce growth for the company is likely to accelerate amidst the novel coronavirus pandemic. Second, the company is making big investments in the cloud business, which is likely to be another cash flow machine for the company.
In April 2020, Alibaba announced that the company will be investing $28 billion in cloud business over the next three years. If I go back to 2018, the company’s CEO had opined that cloud computing will be the “main business for Alibaba in the future.” The investment plan is a step in that direction.
In terms of the cloud business trigger upside for BABA stock, the company expects the segment to be profitable in the current fiscal year. Alibaba’s CEO Daniel Zhang believes that the world is in a “nascent stage of the global cloud era.”
This puts into perspective the impending growth for Alibaba in the cloud business. As a matter of fact, Alibaba cloud already has a top market share in Asia Pacific.
For the June quarter, the company reported 59% year-on-year revenue growth. Given the growth trajectory coupled with the visibility for profitability, the cloud business will drive BABA stock higher in the long term. I believe that BABA stock is among the top cloud stocks to buy.
Any discussion on cloud stock is incomplete without the mention of Amazon Web Services. According to data from the second quarter of 2020, AWS has a leading market share of 31% in the worldwide cloud infrastructure. Microsoft (NASDAQ:MSFT) is still a distant second with a market share of 20%.
For the second quarter, AWS registered top-line growth of 29%. While the growth rate has decelerated, even 25% growth in this segment is attractive for the long-term considering the revenue base. The AWS business is positioned for an annualized revenue of $40 billion for the current year. Furthermore, the novel coronavirus pandemic has increased the demand for cloud infrastructure.
As an example, Zoom Video Communications (NASDAQ:ZM) stock has surged by 250% in the last six months with growing demand for virtual meetings and online learning. Zoom utilizes AWS to host a significant portion of its network.
I would therefore not be surprised if growth potentially accelerates for AWS in the coming quarters. For Amazon, the e-commerce business is already a cash flow machine. The cloud business will increasingly contribute to free cash flows in the coming years.
Overall, AMZN stock is a core portfolio stock that should be considered for exposure on any decline. The stock has corrected from 52-week highs of $3,552. Investors can consider gradual accumulation with broad markets near all-time highs.
CRM stock has surged higher by 89% in the last six months. However, the stock has pulled back from its 52-week highs of $284.50.
As an overview, Salesforce is the leading customer relationship management software provider in the world. The company’s cloud-based CRM application is used for sales, marketing and service, among others.
The company’s revenue growth has been robust and the earnings growth outlook is attractive. Analyst estimates indicate to annual earnings growth of 18% for the next five years.
This is likely considering the fact that the company believes that the total addressable market is $176 billion. It’s worth noting that the company has been increasing international investments.
In the most recent quarter, the company reported $3.6 billion in revenue from the Americas. However, EMEA and APAC revenue were just $1.1 billion and $485 million respectively. International markets are likely to be future growth drivers.
For the last quarter, the company also reported $9.3 billion in cash and equivalents. This financial flexibility gives the company headroom for organic and inorganic growth. Salesforce does have a 9.9% passive stake in Snowflake.
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 modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.