With strong growth, cloud computing has been one of the key investment themes in the last few years. Further, growth for the industry is far from over. Cloud stocks will therefore remain in the limelight in the coming years.
To put things into perspective, the cloud computing industry is expected to grow at a compound annual growth rate of 17.5% in the next five years. Another estimate points to growth at a CAGR of 16.4% over the next seven years.
If the estimates hold true, the is a big growth opportunity for multiple companies. However, there will be companies that grow well above the industry average and other that fail to capitalize on the potential.
These three cloud stocks that are ahead of competition. I believe that these cloud service providers will grow at a rate that’s above the industry average. These cloud stocks are worth holding in the long-term portfolio with the cloud business proven to be a cash flow machine.
Cloud Stocks to Buy: Alibaba Group (BABA)
Alibaba cloud is ranked fourth if we look at the global cloud market share. However, Alibaba cloud has a top market share in Asia-Pacific for Infrastructure as a Service (IaaS) and Infrastructure Utility Services (IUS).
As a comparison, Alibaba has a 47.3% cloud market share in China. Amazon Web Services has a market share of 8.8% in the country. I strongly believe that Alibaba can maintain leadership position in the region.
A key reason for this view is the company’s investment plan for the next three years. The group will be investing $28 billion in cloud infrastructure through fiscal year 2022. This is likely to help the company stay ahead of peers.
In terms of the growth potential, Alibaba CEO Daniel Zhang believe that “cloud computing will likely be the main business for Alibaba in the future.” This is an indication of the growth the company is expecting.
Alibaba’s cloud business is likely to be profitable for the first time in the coming quarter. This is likely to be a trigger for BABA stock trending higher.
Salesforce.com is another attractive name among cloud stocks that has been ahead of the competition. CRM stock has trended higher by 29% in the last six months. I do believe that there is more juice in the rally in 2021.
As an overview, Salesforce.com has the world’s largest cloud-based customer relationship management software platform. As a CRM provider, the company has maintained leadership position for the seventh consecutive year.
Salesforce.com also believes that the company’s total addressable market is expected to grow at a CAGR of 11% between the next year and 2025. This would imply strong growth for the company in the coming years. I therefore believe that a forward P/E ratio of 48.2 is not expensive.
Earlier this year, salesforce.com also launched “Government Cloud Plus.” The “cloud infrastructure specifically isolated for U.S. federal, state, and local government customers, U.S. government contractors, and federally funded research and development centers.”
This is another big area of growth. Microsoft (NASDAQ:MSFT) is already pushing for more government contracts after a $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract win. If Salesforce.com can make inroads in this segment, top-line growth can accelerate further.
Overall, CRM stock has corrected by 20% from all-time highs and is worth accumulating at current levels.
Any discussion on cloud stocks would be incomplete without talking about AMZN stock. Amazon Web Services is the global market leader in cloud computing with a 32% market share as of the third quarter. AWS market share is more than the combined market share of Microsoft, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Alibaba Group. Clearly, Amazon is way ahead of competition.
For the third quarter, the global cloud market grew by 33% to $36.5 billion. If this growth sustains in the coming quarters, Amazon is well positioned to benefit. This is likely to be the case as the pandemic has boosted the market for cloud infrastructure.
AWS generated operating income of $3.54 billion for Q3, which was higher by 56% on a year-over-year basis. While Amazon derives 12% of revenue from AWS, 57% of operating income is from this segment. As the segment continues to grow, free cash flows will increase significantly.
Amazon’s operating income contribution from the cloud business is an indication of things to come. For the latter, core commerce is still the cash flow machine. That’s likely to change in the next five years.
Coming back to AMZN stock, I am expecting a break-out from the current consolidation zone. Therefore, current levels are attractive for fresh exposure.
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.