Goldman Sachs’ 7 Best Cloud Stocks to Buy

Analysts are bullish on cloud stocks in 2021.

One of the few segments of the economy that benefited from the health crisis lockdown is cloud software. Cloud stocks are thriving as the global economy shifts from offline to online. However, many cloud stocks logged huge gains in the past year, leaving analysts and investors concerned about stretched valuations. Goldman Sachs analyst Kash Rangan recently initiated coverage of a dozen cloud software stocks. Rangan says enterprise cloud spending will rebound in the second half of 2021, and he prefers stocks that have both reasonable valuations and high-quality growth outlooks. Here are seven of Goldman’s top cloud stocks to buy. (ticker: CRM)

Rangan says customer relationship management software giant is a leader in the economic digital transformation and has significant scale advantages over its competitors. Rangan says Salesforce’s current revenue performance obligation is growing organically in the high-teen percentages annually, which is extremely impressive for a company the size of Salesforce. Rangan says large acquisitions have slowed Salesforce’s operating margin expansion in recent years, but he says both revenue and margins could double and earnings could quadruple within the next six years. Goldman has a “buy” rating and $315 price target for CRM stock.

Microsoft Corp. (MSFT)

Rangan says Microsoft is gaining significant commercial cloud traction, and Microsoft’s exposure to all layers of the cloud stack makes it a unique investment. Microsoft’s commercial cloud business, which includes Azure, Office 365, Dynamics and LinkedIn Commercial, is a $60 billion business. However, Rangan says that business is well-positioned to more than double in size to between $120 billion and $140 billion in the long term. Goldman estimates Microsoft’s existing on-premise Windows Servers customers could also generate up to $90 billion in new Azure business over time. Goldman has a “buy” rating and $285 price target for MSFT stock.

Workday (WDAY)

Rangan says Workday is highly exposed to a $90 billion total addressable market in human capital management, financials, planning, procurement and analytics. He says the shifting of financials to the cloud by companies will be a significant tailwind for Workday’s core human capital management marquee product. Rangan is anticipating Workday’s large strategic deals will accelerate starting in the second half of fiscal 2022 due to pent-up demand. Backlog growth rates may drop below 20% in the near term, but Rangan says that decline is due to difficult year-over-year comparisons rather than demand weakness. Goldman has a “buy” rating and $300 price target for WDAY stock.

Adobe (ADBE)

Adobe has a dominant market share in its core Creative market, and Rangan says Adobe should continue to grow its Creative subscriber base in the double-digit percentage range annually in the long term. Rangan is projecting several years of earnings, revenue and cash flow growth of more than 10%. He says Adobe’s user base is loyal, making it difficult for competitors to disrupt its position. Goldman is projecting Adobe will have about 54 million Creative subscribers and will be generating about $26 per share in free cash flow by 2026. Goldman has a “buy” rating and $580 price target for ADBE stock.

ServiceNow (NOW)

ServiceNow is a software-as-a-service application provider that specializes in business process and workflow automation. Rangan says ServiceNow is on a path to generating at least $15 billion in annual revenue by 2026, and its user base could eventually rival Microsoft Office 365’s. Rangan says the company’s margins could exceed 30% over time and its free cash flow margins could surpass 35%. However, he said the company will need to expand beyond its core Information Technology Service Management business to hit these long-term financial milestones. Goldman has a “buy” rating and $670 price target for NOW stock.

Splunk (SPLK)

Splunk is a software platform for collecting, organizing, storing and analyzing massive amounts of machine-generated data. Rangan says Splunk shares have an attractive valuation and offer long-term investors a favorable risk-reward setup with potential upside far outweighing downside. He says Splunk’s cloud business is scaling rapidly, and the stock is one of the few big data pure plays in the market. Rangan says Splunk is a “secular growth story” and is forecasting long-term annual revenue growth of more than 20%, expanded operating margins and elevated free cash flow generation. Goldman has a “buy” rating and $240 price target for SPLK stock.

VMware (VMW)

VMware supplies virtualization software, solutions and services. Rangan says he is confident the company can grow annual revenue from around $12 billion to $20 billion in the long term. However, VMware’s cloud business has been negatively impacted by the health crisis more than Goldman’s other top stock picks, and the stock may not have as much upside in the near term. In addition, Rangan says VMware’s relationship with minority investor Dell Technologies (DELL) and the circumstances surrounding a potential spinoff of Dell’s stake create uncertainty for investors. Goldman has a “neutral” rating and $150 price target for VMW stock.

Sunny forecast for these cloud stocks:

— (CRM)

— Microsoft Corp. (MSFT)

— Workday (WDAY)

— Adobe (ADBE)

— ServiceNow (NOW)

— Splunk (SPLK)

— VMware (VMW)

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This content was republished with permission from CNN.

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