After a stormy 2022, skies have brightened again this year for stocks of companies driving the shift to cloud computing. Fundamentally, the momentum never stopped: Spending on public cloud services is expected to rise 22% this year to $597.3 billion, say analysts at Gartner Inc.
The simple reason: Every big tech trend you read about now, from artificial intelligence to the metaverse, runs on the cloud, Gartner says. Analysts say the shift to the cloud is happening because taking software applications off servers sitting at offices of companies that use the software, and shifting them to centralized computers where they can be maintained and updated more efficiently, saves money and time.
If you don’t believe that, consider the behavior of nearly any tech giant — they’ve all been working for years now on how to rework their products to run in the cloud.
And the best of them have turned the cloud into a giant business — Amazon.com Inc.’s (ticker: AMZN) Amazon Web Services unit is acknowledged to be worth several times what the company’s giant retail business is, considering the high price-earnings multiples investors will pay for cloud companies.
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The best cloud stocks are the so-called platform plays; companies that offer services clients will use regardless of which business functions they want to move to the cloud, Wedbush analyst Dan Ives says. That sets them apart from solutions that help manage specific functions like sales, human resources or finance — many of which, like Workday and Hubspot — have been big hits themselves.
Here are Ives’ nominees for the seven best bets on companies building the broad platform for the ongoing cloud-computing transition:
| Cloud stock | Year-to-date return as of June 5 |
| Amazon.com Inc. (AMZN) | 49.2% |
| Zscaler Inc. (ZS) | 32.3% |
| Oracle Corp. (ORCL) | 31.8% |
| Microsoft Corp. (MSFT) | 40.7% |
| Alphabet Inc. (GOOG, GOOGL) | 42.7% |
| Salesforce.com (CRM) | 58.3% |
| Adobe Inc. (ADBE) | 29.0% |
Amazon.com Inc. (AMZN)
AWS is the largest cloud computing service by a good margin, though it’s losing market share as rivals like Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG, GOOGL) gain traction. Up 49.2% this year as of June 5, Amazon shares have to gain another 50% to match their 2021 high. The reasons: Overexpansion in Amazon’s retail business during the pandemic, and slowing growth at AWS, which boosted first-quarter sales by 16% from a year earlier.
The company is trading near an all-time low price-earnings ratio, because overexpansion at both retail and AWS has slashed profit margins, Evercore ISI analyst Mark Mahaney says. The outlook for both businesses is improving as recession fears recede, he says.
Mahaney forecasts that AWS growth, which has slipped to about 11% annually in the second quarter of this year as macro fears hit the technology sector especially hard, will rebound by next year as macro fears fade.
His target is for shares to rise to $150 from $125.30 on June 5. At today’s prices, Amazon trades at a rich 79 times expected earnings, but consensus numbers say profits will jump by almost two-thirds next year.
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Zscaler Inc. (ZS)
Zscaler illustrates Ives’ preference for investing in cloud computing through platform stocks: Its niche is cybersecurity for companies with sprawling tech infrastructure. It claims 5,600 customers, which are mostly big companies, universities and government agencies. Shares are up 32.3% in 2023 as of June 5 but are still far lower than their peak of nearly $400 in 2021. They’re up more than ninefold since Zscaler’s 2018 initial public offering.
It’s not a bet for the financially timid: The company still loses money by traditional accounting standards. Its revenue for the first half of its fiscal 2023 rose 53% to $743.1 million, and it generated operating cash flow — an important precursor to accounting profit — of $217.9 million, up 54%. So the company is well on its way to scaling profitability, Ives argues. But with a market cap of $22 billion, Zscaler’s valuation remains daunting, at least for now.
Oracle Corp. (ORCL)
For those who like valuations more modest, Oracle is a safe approach to cloud migration. Its big edge: Long relationships with a vast array of companies who have long deployed Oracle software in their in-house data centers. Today, Oracle estimates that it gets a third of revenues from cloud products and services, but sales in that segment rose 48% in its most recent quarter.
“Our cloud offerings drive operational efficiency,” says CEO Safra Catz, who said that the company has the widest profit margins in software. “The Oracle playbook is about doing more while spending less.”
Oracle had a recent big win, as Uber Technologies Inc. (UBER) shifted to its platforms beginning in February. Another big driver is last year’s acquisition of electronic medical records giant Cerner. Analysts expect profits to climb 11% in fiscal 2024, which begins in June, putting Oracle’s price-earnings ratio at a non-vertigo-inducing 19.
Microsoft Corp. (MSFT)
The Colossus of Redmond is the rival Amazon sees most clearly in its rearview mirror, being the No. 2 player in cloud computing and showing faster growth than Amazon. Its cloud revenue climbed 25% in the most recent quarter, after currency adjustments, versus about 16% for AWS. The Intelligent Cloud unit is now bigger than either Microsoft’s Office or Windows franchises.
“We have the most powerful AI infrastructure, and it’s being used by our partner OpenAI, as well as Nvidia, and leading AI startups like Adept and Inflection to train large models,” CEO Satya Nadella said on the company’s April 2023 earnings call.
Financially, Microsoft is likely to grow profits at a little more than 10% a year, and it is trading at about 36 times earnings after a 40.7% gain in 2023 as of June 5. That’s a higher valuation than it has commanded in years past, a tribute to the fact that 44 of 52 analysts following the stock think it will outperform the market over the next year, according to FactSet.
“We estimate for every $100 of cloud spend with MSFT the last few years, there is an incremental $35 to $40 of AI spend that now is on the table, which changes the game,” Ives says.
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Alphabet’s cloud offerings have been running third to Microsoft and Amazon for a few years now, but the push into cloud-delivered artificial intelligence gives a company best known for the Google search engine a new edge in a game that’s likely to have more than one winner, Mahaney says.
“We believe that the biggest AI winners will be companies with access to three pools — deep pools of capital, deep pools of data, and deep pools of AI data science excellence,” Mahaney says. Google has $100 billion-plus in cash, data from literally billions of customers, and 9,000 published papers on AI by Google scientists, he adds. “Very, very few companies (like three or four, maybe) can match Google’s access to these three pools.”
Up 42.7% so far this year, Alphabet stock trades at a forward price-earnings of about 20. That relatively low number reflects concerns about the potential impact of Microsoft’s AI product on growth in advertising sales for Google’s search engine.
Salesforce.com (CRM)
One of the earliest cloud computing plays, going public before Google in 2004, Salesforce is set to capitalize as artificial intelligence technology begins to work into its customer relationship management tools and other products, Ives says.
Like other cloud plays, the business went through some things in the last year, with layoffs happening as recently as March 2023. Shares also got hit after a May earnings report in which the company beat its sales and profit targets, but offered soft guidance for the rest of the year. Even with the setback, Salesforce is up 58.3% this year as of June 5.
“Despite the head-scratching, knee-jerk stock weakness after (the report), we view CRM as a table pounder at current levels and remains one of the most compelling software names to own in this backdrop with (CEO Marc) Benioff & Co. now on the offensive instead of the defensive,” Ives wrote in a note to clients.
Adobe Inc. (ADBE)
Adobe is a name casual observers might not expect to see on a list of cloud leaders, given how familiar the company’s brand is for long-standing products like its Acrobat PDF maker and Photoshop.
The company is pushing its creative-arts software into the AI revolution using products like Firefly, which allows users of Acrobat and Photoshop to customize and enhance artwork, special effects and images.
“They are a core consumer and enterprise cloud platform play,” Ives says. “A tech stalwart with a massive installed base and well positioned for the cloud transformation.”
The opportunity comes with a forward price-earnings ratio of 25, as the company’s 29% gain so far this year has recovered its losses since spring 2022 but the stock remains well short of its 2021 highs.
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7 Best Cloud Stocks to Buy in 2023 originally appeared on usnews.com
Update 06/06/23: This story was previously published at an earlier date and has been updated with new information.
