Many cloud stocks will rebound on the back of strong demand trends in the second quarter
The rapidly spreading novel coronavirus is causing financial markets across the globe to tumble. But, some stocks will actually “win” in response to the pandemic, because of shifts in consumer and enterprise behavior. As such, many of the “winners” will be cloud stocks.
The thinking is pretty simple. Every student is now learning from home. Every employee — if possible — is now working from home. And every consumer is now shopping from home. That means every academic institution, every enterprise and every consumer-facing business needs to have a digital presence built on the cloud in order to survive. Demand for cloud computing technology should, therefore, accelerate over the next few quarters.
As the analyst team over at Wedbush wrote in a note from last week:
“With remote learning, work from home, and more applications and technology needing to be accessed during this lockdown, we emphasis the shift to cloud computing over the last few years is now the ‘hearts and lungs’ core technology and infrastructure enabling companies and governments globally to operate smoothly during this unprecedented stay at home period.”
This isn’t a near-term, one-time boost. Companies that pivot to the cloud, end up staying in the cloud. In this sense, major cloud providers have an opportunity to generate significant, long-term tailwinds coming out of this pandemic.
Yet, cloud stocks — alongside the rest of the market — are falling off a cliff. Year-to-date, the First Trust Cloud Computing ETF (NASDAQ:SKYY) is off 10%.
All things considered, then, it seems like now is the time to buy the dip in high quality cloud stocks. Some top cloud stocks to buy on the coronavirus dip include:
Cloud Stocks to Buy on the Dip: Microsoft (MSFT)
Of all potential cloud stocks to buy on the dip, the one that looks the most compelling is Microsoft.
That’s because Microsoft has the most momentum in this space. Exiting 2019, Microsoft had just won the hugely sought-after $10 billion cloud computing contract for the Pentagon. The contract win was broadly seen by insiders and analysts as confirmation that Microsoft has the strongest cloud infrastructure business in America, and many believed the company could turn that huge contract win into several, smaller contract wins throughout 2020 and 2021.
The coronavirus pandemic has thrown a wrench into that thesis. But not for long.
As stated in the intro, cloud computing demand will actually accelerate higher now. Not just for cloud infrastructure services like Azure. But for cloud-host enterprise works solutions like Microsoft Teams and Office 365, too.
As it does, Microsoft’s cloud business will regain the momentum it had in late 2019. This healthy momentum will propel the company to win contract after contract, post steady double-digit growth and guide the stock back to all-time highs.
Another top tier cloud stock to buy on the dip is Alphabet.
Alphabet’s Google Cloud is one of the three major players in the U.S. cloud infrastructure market. Naturally, this positioning exposes the company to coronavirus-related cloud computing tailwinds over the next few quarters. Such exposure should provide a lift to Alphabet’s overall growth trajectory.
That’s the good news.
The better news is that Alphabet also has the world’s biggest digital advertising business — which should be able to weather the coronavirus storm because of increased consumer engagement on things like Google Search and YouTube — and one of the strongest balance sheets in technology (the company’s cash pile measures around $120 billion).
The best news is that, for all of those positives, GOOG stock trades at just 21-times forward earnings, a multi-year low valuation for the tech giant.
Connecting all the dots, Alphabet stock looks like a strong “buy the dip” candidate here.
The bull thesis on Adobe is fairly straightforward.
Adobe is the dominant player in providing various cloud-enabled creative and work solutions to consumers and enterprises. Demand for these solutions was robust before the coronavirus pandemic, as both consumers and enterprises were shifting towards creating, editing and publishing pictures, videos and work documents online.
It will remain robust during the coronavirus pandemic, because consumers and enterprises will remain on this shift in a “stay at home” environment. It also helps that the company employs a subscription-based model, the likes of which won’t see a significant downturn even if demand does dry up.
“Our recurring revenue model and the real-time visibility we have into our business uniquely positions Adobe to manage through an uncertain environment,” said CFO John Murphy in a recent press release.
It should be no surprise, then, that Adobe reported 19% revenue growth in the first quarter of 2020. Or that management is guiding for about 16% revenue growth in the second quarter. Or that profits rose more than 25% year over year in Q1.
Those are the types of numbers Adobe will continue to report for the foreseeable future. So long as they do, this stock will charge higher.
Cloud customer-relationship-management (CRM) giant Salesforce is one of the best cloud stocks to buy on the dip, not because of what has happened, but because of what will happen.
What has happened in 2020 isn’t that great. According to JMP Securities, enterprise spending on business help tools like Salesforce’s cloud CRM tools has dropped by about 20% in the wake of the coronavirus pandemic.
But, this weakness won’t last forever.
It increasingly appears that the whole “work from home” situation will stay in place until the end of April, at least. Companies can’t afford to sit on their hands and not invest for a whole month. Eventually, they will do their best to get back to business as usual, even if all employees are working remotely. When they do, they will re-up investment into various mission-critical services. For many companies, Salesforce’s cloud CRM tools are some of those mission-critical services.
Broadly, over the next few weeks, Salesforce’s demand trends will rebound. Rebounding demand will drive a rebound in Salesforce stock.
Last, but not least, on this list of cloud stocks to buy is the cloud infrastructure market’s biggest player: Amazon.
It’s no secret that Amazon Web Services is the Goliath in cloud infrastructure. With over 30% market share, AWS dwarfs Azure (17% share) and Google Cloud (6% share). This dominant positioning exposes Amazon to robust cloud infrastructure tailwinds over the next few weeks, and should provide a nice boost to Amazon’s overall growth trajectory.
At the same time, Amazon’s other big business — the e-commerce platform — is also “winning” during the pandemic. Consumers aren’t shopping in physical stores anymore. But, they still need to shop, especially for household essentials and consumer staples. They are doing all of that shopping on e-commerce websites, of which Amazon.com is the largest.
Big picture: both of Amazon’s core businesses are “winning” during the coronavirus pandemic, making the recent 10% drop in share price seem unwarranted.
Author: Luke Lango
Source: Investor Place: 5 Cloud Stocks to Buy on the Coronavirus Dip