Wednesday’s price action on Wall Street favored the bulls. In spite of a slew of scary headlines, the S&P 500 closed up 2% for today. However, there still are some out of favor and weak pockets of the market. Today we will focus on finding three cloud stocks to buy among them.
I also made it a point to chose ones who have already reported earnings. Lately the reactions to those is too arbitrary, so I prefer avoiding a coin-flip trade when possible.
But first we must set the scene of the general state of Wall Street. There is no doubt that there is a crisis going on. First it was one from the lack of confidence, but Russia’s invasion of Ukraine made it tangible and legitimate fears.
The macroeconomic conditions, on the other hand, are still strong. So much so that the Federal Reserve is starting a rate hike cycle to control it. Chairman Jerome Powell hinted at this yesterday during his testimony in front of the House of Representatives Financial Services Committee. Even though the Fed will be less accommodative, companies should continue to do well.
The Fed’s goal is to curb inflation, but not kill the momentum they struggled to create. Therefore, my assumptions this year do not include an actual recession in the economy. But I am realistic about the potential for one in equity prices. So my picks of cloud stocks to buy will include only solid fundamentals. I aim to eliminate as many question marks as possible. I fail to see the need to stretch the list to include companies with weak financials.
When the environment includes so many uncertainties, it would be smart to not to add to them. Our three companies here are up and running without flagrant business problems.
The largest source of worry this week is about the global geopolitical stability. The situation in Ukraine escalated quickly, and remains unstable for the foreseeable futures. There is a lot on the line for all parties, so I am hopeful they will diffuse the situation quickly.
The world is still trying to come out of a pandemic that cost us more than 5 million lives. There is no need that we add to it from an avoidable war.
Amazon (NASDAQ:AMZN) may own the cloud now, but here are three other cloud stocks to buy:
Stocks to Buy: Salesforce.com (CRM)
We cannot discuss opportunities in cloud stocks to buy without including the OG. Salesforce.com effectively invented the business in 1999. They were the tiny company that battled giants like Microsoft (NASDAQ:MSFT) and beat them. This gave its management, especially CEO Mark Benioff, instant clout. They quickly earned the benefit of the doubt and for good reason.
As they rose to dominance, they broke many corporate growth records. This is a matter of fact not opinion, so I am comfortable trusting that they are still doing things right. Judging by the financial metrics, the leadership hasn’t skipped a beat yet. They are still pursuing growth like with their acquisition of Slack. That headline cost CRM stock a lot of grief in 2020, but eventually it found footing near $205. Incidentally, those are the levels trying to support CRM now. The Feb. 24 market crash took it to pre-pandemic levels.
As for the aggressive growth, they still go it. The business tripled since 2016, and almost doubled since 2018. This week’s report showed that they grew sales 26% to last year. So you can see why I am not ready to give up on CRM stock yet. Dips like these are opportunities to buy a great cloud stock for a bargain. According to Yahoo Finance, the experts agree as it received good nods from several of them this week. Moreover, its price now is 30% below their average price target.
Ideally I would prefer starting a position from the February low. But it is still close enough, especially if investors do not go all in. It is important to either use options, or take the positions in tranches. There is likely resistance brewing going into the $234 per share zone. Using options, I could sell an April put 15% below price and collect a premium to be long the stock. This trade doesn’t even need a rally, and CRM can fall 16% and I’d still have the chance to profit.
Unlike CRM, Snowflake is trying to earn its kudos with investors. This is not because of incompetence, but it’s from not having enough history. Investors are on edge, so they are stingy with their allotment of trust points.
Last night’s reaction to their earnings reports is proof. The stock collapsed 30% on the headline even though it was strong. The captions I read were all about SNOW’s miss to its earnings-per-share expectations. This is not that important, and it’s a mistake focusing on it.
Sure, their earnings per share were -43 cents, which is 27 cents worse that last year. I fail to see the problem, when in return they more than doubled the business. Somehow, the headlines last night failed to point out that revenues grew 101% from last year. I am not one to question why they spent a few pennies extra to do it. The ultimate goal of running a company is to grow it. From the scorecard I saw last night, there is nothing to fret here.
Management also announced the acquisition of Streamlit for $800 million. Perhaps this spooked investors who were already focusing on the earnings miss. In a world that is getting more dependent on data, it would be advantageous for SNOW to have this open source database app company. I would trust the team to know how well a fit Streamlit is to their current offerings.
Technically, there is also good news even from having a massive drop last night. As investors panicked, SNOW stock fell into its all-time low from May 2021. Those who panic out of it that low will hand it over to stronger hands. Falling far from there is not likely easy, which translates into support.
Here too, investors should take partial positions first. Drops this big may have a day or two of follow through.
Stocks to Buy: Baidu (BIDU)
So far we’ve noted the geopolitical and Fed rate hike fears plaguing CRM stock. We also highlighted the lack of trust in SNOW’s EPS statistic. Baidu stock has yet another special ailment, and it stems from its domestic political powers.
In the past two years, Chinese authorities embarked on a campaign to tamp down its most successful companies. As a result, great stocks like BIDU, and Alibaba (NYSE:BABA) collapsed. The trigger was comments from Jack Ma, the ex-CEO of Alibaba, but the writing was already on the wall. In the end, BIDU stock lost more than 60% of its value in about 10 months.
The debacle unfolded in a relentless multi-month process and it was painful to investors. The businesses remained healthy, but the stocks became toxic.
Even though Baidu’s revenue grew 26% since the pandemic, investors didn’t care. They saw the carnage and they did not want to catch falling machetes. I tried a few longs with BABA stock with mixed results. Eventually, the frustration was too great, but I am itching to try again.
For BIDU there is perhaps some light at the end of this nightmare. In reality, the advertising business is slowing because they are in a sales mix shift. Management is in the process of growing revenue from other sources. They are expanding into hotter topics for the future like artificial intelligence. Adaptability is a great asset for this team to have.
In addition, BIDU stock may be putting in a technical bottom. The indices crashed on Jan. 24 and again s month later into two successive scary lows. But BIDU did not, and it has held better lows than its bottom in December. The market-wide test in January and February were strongest since the pandemic, so BIDU deserves credit for it.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.