Data is currency. Businesses use data to discover inefficiencies, tap into new opportunities and increase profit margins. Cloud computing allows companies to store and manage their resources to access more data points and enable better workflows. The technology also eliminates many expenses for business owners. Cloud computing companies eliminate the need for businesses to own data centers and make expensive purchases of high-end technology. These platforms provide more affordable access to computing. The technology has helped many businesses, and cloud computing stocks have rewarded investors. If you want to profit from the growing importance of cloud computing, these three undervalued stocks look compelling.
Arista Networks (ANET)
Arista Network (NYSE:ANET) is a $60 billion cloud computing company with a 36 P/E ratio. The stock has rewarded long-term investors with a 55% year-to-date (YTD) gain and a 177% increase over the past five years.
Arista Networks’ product suite helps customers easily manage their resources through CloudVision. The company’s zero trust networking approach helps keep important data secure. Arista Networks’ NDR Platform conducts diagnostics in the background. It can detect threats and respond to them in a matter of seconds.
ANET has a history of strong revenue and earnings growth. The company is profitable and reported a GAAP net income of $491.9 million in the second quarter. It represents a 64.5% year-over-year (YOY) increase. The cloud computing company also exhibited exceptional revenue growth. The firm’s $1.46 billion in revenue represents an 8.0% increase from the previous quarter and a 38.7% YOY increase.
Arista Networks delivers reliable products, has good financials and trades at a reasonable valuation. It is an undervalued cloud computing stock that is worth considering.
ServiceNow (NYSE:NOW) is a $122 billion cloud computing company that has delivered nearly identical gains as ANET stock. NOW stock has returned 53% YTD and 191% over the past five years. NOW has a higher P/E ratio than Arista Networks. The current P/E ratio is 86, but higher earnings growth has the company trading at a more reasonable 49 forward P/E ratio.
ServiceNow offers premium cloud computing solutions for 7,700 global enterprise customers. 85% of Fortune 500 companies are among those customers, and they are sticky. ServiceNow has a 99% renewal rate for its products and aims to generate $6.89 billion in subscription revenue in fiscal year 2023. This target represents 28.5% YOY constant currency growth.
ServiceNow’s leadership is ambitious, and second-quarter earnings demonstrate the ambition is well placed. In the second quarter, ServiceNow reported 23% YOY revenue growth. ServiceNow CEO Bill McDermott expressed optimism about the company’s rising demand. “ServiceNow results were supercharged by unprecedented demand for our organic innovation,” he said. “We’re in a powerful new ‘AI world,’ where imagination is the only limit.”
Microsoft (NASDAQ:MSFT) is one of the most promising large-cap tech companies due to its growing financials and 34 P/E ratio. MSFT stock experienced 8% YOY revenue growth and 20.0% YOY net income growth in the fourth fiscal quarter.
The company reported 15% YOY revenue growth for its intelligent cloud segment, largely driven by Azure. This segment represented over 40% of Microsoft’s total revenue in the fourth fiscal quarter.
Microsoft has exposure to various opportunities, such as personal computers, video games and other industries. However, artificial intelligence is one of Microsoft’s largest opportunities. The company’s cloud computing solutions will become more valuable as the AI boom gains momentum. Microsoft CEO Satya Nadella mentioned how AI is already generating more demand for the company’s profits.
“Organizations are asking not only how – but how fast – they can apply this next generation of AI to address the biggest opportunities and challenges they face – safely and responsibly,” he said.
On this date of publication, Marc Guberti held a long position in ANET. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.