In this article, we are going to talk about the 14 best cloud computing stocks to invest in. You can skip our detailed discussion about the trends in the Cloud computing industry and go to the 5 Best Cloud Computing Stocks to Invest In.
Cloud computing is one of the most in-demand and fastest-growing tech sectors boosted by digitalization, especially during the pandemic. The COVID-19 pandemic further highlighted the demand for cloud computing services given their flexible costs, scalability, and efficiency. According to a PWC study, in the first quarter of 2020, spending on cloud computing was already at $29 billion, up 38% compared to the same quarter of 2019.
Cloud computing is the fastest-growing tech segment in the market, with over 3.6 billion users in 2018 and a global market size that reached $266 billion in 2019. Many investors believe that the cloud computing industry will continue to grow as more companies adapt to the work-from-home era. For instance, during the enforced lockdown, companies relied solely on the adaption of Software-As-A-Service (SaaS) based solutions to safeguard their employees. According to a study published in Insivia, in 2021, SaaS spending for more prominent companies will reach $4.16 million.
Fund managers are starting to cut back on tech stocks due to the 10-year treasury yield increase from around 1.07% in February to 1.68% in March. Speculations that inflation will continuously increase are pushing investors to invest in more low-risk stocks.
However, analysts are optimistic that tech stocks will still dominate 34% of the US stock market, followed by Bitcoin and global cyclical stocks. Strategists believe the driving factor in its growth is the cloud software, where most workloads are foreseen by 2023.
The most prominent cloud computing companies offer secure and efficient software services at a reasonable price. Yet US IT firm SolarWinds (NYSE:SWI) became the talk of the town on December 2020 when the company announced that there has been a cyberattack that extended to its 18,000 clients including Microsoft, Intel, Cisco, and Deloitte that went undetected for months. The hackers were able to tap the US government networks such as the Department of Treasury, the Department of Homeland Security, the National Nuclear Security Administration, and the Department of Energy.
Why Invest in Cloud Computing?
The demand for cloud computing technology was already breaking records before the COVID-19 pandemic. In the first half of 2019, the cloud computing revenue increased 24% to $150 billion.
The market will continue to increase, given its ability to revolutionize the tech industry. In a study by Markets and Markets, in 2020, the global cloud computing industry was estimated at $371.4 billion. By 2025, the value will grow to $832.1 billion with a Compound Annual Growth Rate (CAGR) of 17.5%.
Cloud computing has the ability to give customers high-quality, quick-loading networks and applications which will improve network and storage quality. This high standard of quality would also contribute to increased business quality over time. Oracle Corporation (NYSE:ORCL) mentioned that their users saved up to 30-50% of disk space when they transferred their applications to their cloud software.
Cloud Computing Amidst the COVID-19 Pandemic
In a MariaDB survey, 40% of companies increased their cloud awareness for remote work. According to a report by Gartner, in 2024, IT spending on the cloud computing sector will grow 14.2% from 9.1% in 2020 following the coronavirus pandemic.
Following the steps of the leading cloud computing giants in the industry such as Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) is cloud computing startup Snowflake (NYSE:SNOW) which went public in 2020 and raised a valuation of $3.46 billion in its Initial Public Offering (IPO). In the fourth quarter of 2020, the companys public-cloud-based services revenue was up 165% to $106 million year-over-year.
Despite all this, you should practice caution before investing as financial volatility is affecting even the experts. On the other hand, Insider Monkeys research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th, 2021, our monthly newsletters stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017, and they lost 13% through November 16th. Thats why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
To identify the 14 best cloud computing stocks to invest in, we started with the 36 holdings from the Global x Cloud Computing ETF as of April 9, 2021, and we were able to narrow down our list to 14 stocks by using the hedge fund sentiment scores. Hedge fund sentiment means the number of hedge funds bullish on a stock. We calculate that by evaluating 13F holdings disclosed by over 800 hedge funds. With that said, we present to you the 14 best cloud computing stocks to invest in.
No of Hfs: 43
Total Value of HF Holdings: $962 Million
Ranking 14th in our list of the best cloud computing stocks to invest in is Dropbox, Inc. The smart workspace software allows users to save their disk space without compromising data quality by allowing them to store items in the cloud. DBX offers 2GB free storage space in its basic account for users who want to try the software before spending on it. The company first went public in 2018 with a $21 per share initial public offering (IPO), which gave the company a market cap of over $8.2 billion. In the third quarter of 2019, the company increased its subscriptions to around 600 million users and 14.3 million paying users. Last month, the company acquired DocSend, a software that permits users to share business-critical reports and obtain real-time feedback, in a transaction priced at $165 million.
The companys revenue in 2020 grew 15% to $1.91 billion, with a total of 15.48 million paying users worldwide. Shares of DBX surged 49% over the past twelve months.
Jim Simons Renaissance Technologies is one of the top hedge funds having positions in DBX, which had 17 million shares, worth $378 million at the end of the fourth quarter.
Saga Partners mentioned DBXs user surge during the COVID-19 pandemic was not enough to beat its competitor, Microsoft Teams, in its Q4 2020 investor letter:
If I were to label certain decisions mistakes, Dropbox would fall in that category. Fortunately, this mistake did not incur a material loss to the Portfolio. However, just because an outcome was not unfavorable does not mean it was not a mistake.
The Portfolio first purchased Dropbox in 2019. My thesis originally surrounded the idea that Dropbox was the winning independent file/content sharing and collaboration platform that could potentially aggregate the increasing number of third-party work applications. This would create a neutral hub/platform for knowledge workers to manage their content and workflows. Dropbox had a strong track record and what I believed to be an advantageous position with its 600 million registered userbase.
I thought an independent/neutral platform that could integrate the best third-party workflow applications would provide a better user experience than a bundled platform with less desired applications and therefore be able to drive attractive economics long-term. There were early signs that this might come to fruition when Dropbox launched their desktop smart workspace application. However, as COVID spread, one would think that Dropbox was favorably positioned to take advantage of the surge in remote working. While Dropbox did see an uplift in demand, what caught me by surprise was the more significant surge in usage of Microsoft Teams, arguably Dropboxs primary competitor in the enterprise space.
In 2017, Microsoft bundled its collaborative business software into Teams, making it the primary communication platform for its enterprise clients. What I originally viewed as a disadvantage, a bundled product that had applications customers desired less or worse integrations with third-party applications, ended up being an advantage. Its key advantage is it natively integrates with Word, PowerPoint and Microsofts other apps. For businesses already subscribed to Microsoft 365 Business, Teams is a free add-on instead of a separate bill. Microsoft does not break out its Teams revenue or paying userbase, but it has certainly seen strong growth since the onset of COVID.
Dropboxs desktop application that seamlessly integrates with the other most demanded third-party business applications may provide a better user experience, but it appears to not be good enough to break away from the Microsoft Teams bundle. Dropbox does benefit from a sticky userbase and will likely continue to grow paid users and upsell existing paid users, driving consistent cash flows and modest growth. However, I determined that Dropboxs long-term outlook is likely not as attractive as I originally anticipated as the strength of Microsofts bundle became clearer post-COVID. Perhaps Dropbox will follow a similar path as Slack and be an acquisition target, though that is not an investment thesis I want to rely on. Dropbox may still have a bright future, but as in any investing decision, when compared to other opportunities available at the time, I made the decision to reallocate to what I believed to be more attractive opportunities.
No of HFs: 51
Total Value of HF Holdings: $998 Million
Ranking 13th in our list of 14 best cloud computing stocks to invest in is one of the most valuable computer firms worldwide, International Business Machines, Corp. The company specializes in over 170 products, including its hybrid cloud platform that combines platform as a service (PaaS) with infrastructure as a service (IaaS) which caters to small and large businesses. IBM recently announced the worldwide availability of its financial service-ready cloud platform to help decrease financial institutions risk. The cloud computing platform is in collaboration with Bank of America who first used the service in 2019.
The company has a market cap of $121.29 billion and currently offers a dividend yield of 4.80%. IBMs revenue in the full year 2020 is $73.6 billion. Shares of IBM surged 16.77% over the past twelve months. The hedge fund run by Peter Rathjens, Bruce Clarke, and John Campbell is the most significant stakeholder of the company with 2.7 million shares, with $344 million.
No of HFs: 59
Total Value of HF Holdings: $6.00 Billion
Modern video communications provider Zoom Video Communications, Inc ranks 12th in our list of 14 best cloud computing stocks to invest in. Zoom provides a cloud platform for video and audio conferencing, chat, and webinars. During the COVID-19 pandemic, the cloud platform provided an avenue for most companys regular conferences raising its total user base to more than 200 million in March 2020. In Europe alone, the number of installs was 124.7 million, up 2,670% compared to 2019. The company recently announced a partnership with one of the highest class auto racing cars worldwide, Formula One, to deliver communication services during the 2021 Formula One World Championship. The partnership will continue through ongoing competitions.
The companys market cap is $94.77 billion. In the second quarter of the fiscal year 2021, the companys revenue increased 355% to $663.5 million. Shares of ZM jumped 159% over the last twelve months.
Baron Opportunity Fund mentioned that ZM remains a leading player in the unified communications market in its Q4 2020 investor letter:
Zoom Video Communications, Inc. is a cloud-based software company providing a video-first platform for communication. Shares of Zoom declined during the fourth quarter on profit taking following the strong run in the stock because of accelerated pandemic-driven Zoom adoption, revenue growth, and free cash flow generation. We retain conviction as Zoom remains a leading player in disrupting the $100 billion unified communications market with its scalable, globally distributed, cloud-based, video-first offering, while its well-known brand (Zoom is now a verb!) should enable it to grow profitably as it takes market share.
No of HFs: 62
Total Value of HF Holdings: $4.12 Billion
The Business Spend Management (BSM) provider Coupa Software, Inc ranks 12th on the list of the best cloud computing stocks to invest in. The company offers a platform specializing in large numbers of corporate transactional expense data, providing insights on areas of inefficiency and spending patterns. COUP is most famous for its innovative global payment technology, Coupa Pay, a platform for all its Business-to-Business (B2B) payments.
In 2018, the company had 700 users worldwide, including Nike, Concentrix, Coca-Cola, and TD Bank. Last month the company partnered with Japan Cloud, Japans leading cloud computing market in Asia, to deliver a cloud computing platform, Coupa K.K, to growing Japanese companies.
The companys total revenue in 2020 increased 50% to $389.7 million from 2019. Shares of COUP jumped 95.69% over the last twelve months.
Artisan Partners Limited Partnership mentioned that they are particularly excited about Coupa Pay in its Q4 2020 investor letter:
We started new investment campaigns in Coupa Software. Coupa is a leading provider of cloud-based business spend-management software. The company helps 1,400 customers process over $2 trillion in annual spend across more than 5 million suppliers. While this quarters announcement of a major new customer win at Walmart shows it still has a long runway for growth in this business, we are particularly excited about Coupa Payâ€”a recently introduced set of cloud services that seeks to process B2B payments (not just invoices) across its large network. B2B payments has seen far less innovation in recent years compared to B2C (PayPal, Venmo, Square), but we see it as a major opportunity in the years ahead.
No of HFs: 63
Total Value of HF Holdings: $3.06 Billion
Anaplan, Inc. ranks 10the in our list of 14 best cloud computing stocks to invest in. The planning software company established in 2006 offers business-planning cloud software that provides data for decision-making. In 2019, PLAN reported 1,250 customers, including Aviva and Vodafone UK, among others. In 2020, Anaplan, in partnership with OneCloud, developed BizApp to support Anaplan Transactional APIs and deliver real-time data to its users.
Anaplans revenue in the full year 2020 came in at $348 million, up 45% year-over-year. Shares of PLAN grew 65% over the last twelve months. Coatue Management is one of the top hedge funds having positions in PLAN with 8.4 million shares, worth $607 million. An insider purchased 37,000 shares worth $41 in June 2019. The stock is up 43% since then.
No of HFs: 80
Total Value of HF Holdings: $4.44 Billion
California-based Workday Inc is one of the best cloud computing stocks to invest in. The enterprise management cloud company provides cloud service to over 42 million users, including Walmart (NYSE: WMT), Cardinal Health, Inc. (NYSE: CAH), and Home Depot (NYSE: HD). In 2018, the company acquired Workday Adaptive Planning, formerly known as Adaptive Insights, a software-as-a-service (SaaS) company that allows its users to create strategic plans for approximately $1.55 billion.
In 2020, the company entered a partnership with Microsoft (NASDAQ: MSFT) to provide their users access to operate Workday Active Planning on the Microsoft Azure cloud. The agreement also grants MSFT global finance teams access to Workday Active Planning to hasten decision-making.
WDAYs revenue for the fiscal year 2021 increased 19.0% to $4.32 billion from fiscal 2020, while the companys subscription revenue was $3.79 billion, up 22.4% from the previous year. Shares of WDAY soared 77.16% over the past twelve months. One of the most significant hedge funds having stakes in the company is run by Chase Coleman and Feroz Dewan with 4.1 million shares, worth $988 million at the end of the fourth quarter.
Cooper Investors mentioned that WDAY is the cloud leader in Human Capital Management (HCM) in its 4Q 2020 investor letter:
Workday (WDAY) is the Cloud leader in Human Capital Management (HCM) and Financials software. We first met WDAY 7 years ago as a much smaller enterprise but today its on the verge of reporting ~US$4bn in revenues. WDAY has had great success in its HCM offering particularly with the worlds largest companies. However, its Financials product has seen more muted growth with customers reluctant to shift such a core function to the cloud, success here tending to be in the mid-market. Financials comprise only 20% of company revenues today but with the pandemic forcing remote work and benefits, and reliability of Cloud applications becoming clear WDAYs Financials solutions appear ripe for mainstream adoption.
For all WDAYs success and averaging over 35% p.a. sales growth the share has barely outperformed the S&P500 since early 2014 as its sales multiple declined from 26x to 10x. WDAY now trades on a more reasonable but still elevated FCF multiple of 43x. However on our view of normalised margins this multiple of FCF would be even lower, below 30x. The nature of the accounting for SAAS (Software-as-a-Service) businesses is that most growth investment goes through the income statement in R&D or Sales and Marketing, versus capex for a typical industrial business. So growth investment tends to depress reported
earnings. WDAY is investing to grow its top line 20-25% and if they were to slowdown and grow in line with the market (around 10%) we would expect to see a typical 30%+ software margin, up from the 17% reported margin today. WDAY is led by its founders who own 25% of the company â€“ Chairman David Duffield is an industry pioneer previously founding Peoplesoft (eventually acquired by Oracle) while CEO Aneel Bhusri was Vice Chairman of Peoplesoft.
No of HFs: 90
Total Value of HF Holdings: $8.72 Billion
Ranking 9th in our list of the best cloud computing stocks to invest in is Shopify Inc. The e-commerce cloud giant provides a platform to help entrepreneurs market their goods online. With over 1 million users, the firm has a market cap of $141.3 billion. The cloud-based platform caters to users such as Anheuser (NYSE: BUD), PepsiCo (NASDAQ: PEP), and Tesla (NASDAQ: TSLA). During the COVID-19 pandemic, more entrepreneurs started to take an interest in the online platform to sell their goods, and SHOP increased its sales by 47% to $470 million.
The companys total revenue in the full year 2020 came in at $2.92 billion, an 86% increase from the previous year. Shares of SHOP jumped 193% over the last twelve months.
RGA Investment Advisors said the following about SHOP in its Q4 2020 investor letter:
While we are pleased with the results of these specific purchases, we made a huge mistake of omission at that time. This mistake will likely be one of the biggest we ever make in our careers. Specifically, we did deep work on Shopify and loved everything about the business qualitatively. Unfortunately, we ultimately found ourselves unable to get comfortable with the numbers.
We built our model up from the key performance indicators (KPIs) that drive revenues. Our last save of the model dated 8/3/2016 looked as follows: (Page 2). These numbers seemed right from everything we understood about the company. While we tend not to rely on sell-side consensus estimates before finishing our own workup of the business, we do give them a look once we feel comfortable with how we have approached our analysis as it is often helpful to get a sense of what the average participant in the market expects the business to do. With Shopify, the sell-side consensus was so far from where our numbers were shaking out, it seemed almost impossible that we were basing our analysis on the same underlying information. Our natural next step was thus to take the sell-side consensus data and work backwards to figure out the implied expectations on each of the key revenue drivers. Here is what the sell-side consensus looked like as at the time: (Page 2).
Shopifys actual revenues for 2016-2018 ended up being $389m, $673m and $1,073m. In other words, not only were we justifiably far more optimistic than the consensus estimate, but we also were far too conservative in terms of how the company actually performed.
The nature of our job as securities analysts is to take calculated risks, in an uncertain world where the true answer is inherently unknowable before the fact. We operate in what many call an efficient market and subscribe to the belief that for the most part, markets are generally pretty efficient and it requires differentiated analysis to find a return above what the market can offer. So why did we pass on Shopify despite 1) deeply believing in the qualitative elements of the business; and, 2) seeing a meaningful gap between what we expected and the consensus expected? The answer is unfortunate but simple: we lacked confidence in ourselves. It was the first time we truly experienced such a stark divergence between our expectation and the consensus. The result was the inclination was to pound ourselves over the head with how dumb we must be, rather than the other way around. We also learned that the truly great companies use their strong business advantages, smart management and execution to raise the bar every step along the way. Obviously this is a cycle which cannot continue ad infinitum, but especially in instances where our qualitative work identifies the inherent strengths in the business and the numbers shake out to be quite fair, the consistent raising of the bar can be a potent driver for the stock.
Please do not judge us too harshly for our mistake on Shopify, for we have from the very beginning made one commitment above all else to both our clients and ourselves: that we will be better today than we were yesterday, and better tomorrow than we are today. While this mistake was quite costly, it ended up being a key confidence and process builder.
7. Twilio Inc. (NYSE: TWLO)
No of HFs: 94
Total Value of HF Holdings: $5.01 Billion
Messaging platform Twilio Inc ranks 7th in our list of the best cloud computing stocks to invest in. Twilio offers worldwide communication functions by the use of its web service Application Programming Interface (API). In June 2020, the company reported a 24% year-over-year increase in their active customers, which brought up their users to 200,000, including Uber (NYSE: UBER), Airbnb (NASDAQ: ABNB), and eBay (NASDAQ: EBAY). Last month, the firm acquired ValueFirst, an Indian communications-as-a-service (CPaaS) company that engages in business and users connection through internet channels.
Twilios revenue for the full year 2020 is up 55% year-over-year to $1.76 billion. Shares of TWLO surged 286% over the last twelve months.
No of HFs: 97
Total Value of HF Holdings: $10.5 Billion
Salesforce.Com, Inc. ranks 6th on the list of 14 best cloud computing stocks to invest in. On top of its customer relationship management service, the firm also engages in cloud applications centered on marketing automation, analytics, and application development. With over 60 million personal, proactive equipment delivered, the company caters to users like Spotify (NYSE: SPOT), Toyota Motor (NYSE: TM), and Amazon Web Services (NASDAQ: AMZN). Salesforce recently purchased Slack Technologies, Inc, an international software that focuses on cloud collaboration, in a $27.7 billion deal. The acquisition allowed the company to enhance messaging collaboration features and cloud services.
In the fiscal year 2021, the companys total revenue came in at $21 billion. Shares of CRM jumped 49% over the last twelve months. Analyst Piper Sandler downgraded the stock to Neutral from Overweight and lowered the price target to $242 from $278.
Vulcan Value Partners mentioned that the effect of COVID-19 improved CRM prospects and future returns in its Q4 2020 investor letter:
We purchased Salesforce.com Inc. during the quarter. Salesforce is the dominant provider of customer relationship management (CRM) software and technology. Over the years, Salesforce has expanded its services to capture the entire lifecycle of a customer, including the ability to integrate third-party applications. Salesforce has high retention rates, pricing power, a large and growing addressable market, strong free cash flow, and a competitive moat. Salesforce is spending aggressively to capture a larger share of its rapidly growing total addressable market. As a result, we believe that Salesforces value should compound through continued investment in top line growth and margin expansion over time. The recent effects of COVID-19 have only improved its prospects and future returns. We purchased Salesforce.com just before the announcement of the Slack acquisition. The market reacted negatively to the acquisition, and its stock price fell, making Salesforce.com a material detractor to the Portfolio during the quarter. We feel good about the acquisition of Slack as it allows for a more comprehensive CRM offering which will increase the companys competitive moat.
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Disclosure: None. 14 Best Cloud Computing Stocks to Invest In is originally published at Insider Monkey.