Innovative cloud computing stocks benefit from increased enterprise budgets on cloud infrastructure and applications
- Digitization and cloud migration continue, providing a tailwind for these cloud computing stocks.
- HubSpot (HUBS): Is the preferred customer relationship management (CRM) solution for small and medium-sized businesses.
- Datadog (DDOG): Cloud migration will drive demand for application performance monitoring and observability tools.
- Cloudflare (NET): The security, performance and reliability company is building a global cloud infrastructure network to secure and support applications.
Cloud computing has rapidly transformed how businesses operate in recent years. Due to the security, cost savings and flexibility benefits, demand for cloud-based services and technologies continues to grow. Across the technology stack, whether it’s data storage solutions, infrastructure, applications hosted and delivered through the cloud or high-performance computing, cloud services have never been in such high demand. As cloud migration continues and the economy undergoes a digital transformation, cloud computing stocks will ride these secular themes.
Due to its scalable nature, innovative solutions and cost-savings, cloud computing will continue growing in the face of uncertain macroeconomic conditions. Statista projects public cloud spending to grow at a compounded annual growth rate (CAGR) of 13.81% between 2023-2027. While large cloud service providers like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) have dominated cloud offerings, small companies also stand a chance. Usually, these underdogs are nimbler and can move faster on product innovation. Over the last decade, smaller cloud players have demonstrated higher revenue growth. Now, they possess unique competitive advantages that position them for sustainable growth. This article will highlight three stocks to buy that could be the next cloud computing champion.
Data last updated: April 13, 2023 1:40 AM EDT
|DDOG||Datadog Inc Cl A||$66.84|
|NET||Cloudflare Inc Cl A||$63.04|
HubSpot (NYSE:HUBS) is a cloud-based marketing, sales and customer service software platform. Its software-as-a-service (SaaS) solution helps businesses attract, engage and delight customers. These tools facilitate communication and automation across various customer touchpoints. The company’s software integrates multiple tools into a single platform, including email marketing, social media management, customer relationship management (CRM) and analytics. This makes it easier for businesses to manage their customer interactions and marketing campaigns from one place rather than using multiple tools from different providers.
The company has adopted a unique strategy and market approach, giving it a competitive advantage over its peers. Firstly, it has developed its all-in-one platform around the concept of “inbound marketing.” Instead of utilizing traditional push marketing that constantly interrupts customers with unwanted messages, inbound marketing provides relevant and helpful content that attracts and engages customers. Secondly, it has adopted a different market approach. While its larger competitor Salesforce (NYSE:CRM), has been focusing on enterprise customers, HubSpot has been targeting the mid-market category focusing on small and medium-sized businesses (SMBs).
Financially, HubSpot has consistently shown strong growth. Based on industry trends, their outstanding growth is likely to continue. According to Gartner, the CRM market will grow 14% annually through 2025. HubSpot has consistently outpaced peers in the industry and will likely maintain its outperformance. For instance, the latest quarterly report showed 27% and 28% year-over-year (YOY) total revenue and subscription growth, respectively. Also, the company is growing profitably, generating $191.4 million in free cash flow (FCF) in 2022. Despite the challenging macro backdrop in 2022, customers increased by 24% to 167,386. Looking ahead, it is well-positioned to become the cloud CRM platform of choice for SMBs. Given its growth prospects, the stock is attractive at a current price-to-sales (P/S) of 11.6 and price-to-free cash flow (P/FCF) of 85.
This application performance monitoring and observability leader could be the next cloud computing champion. Datadog (NASDAQ:DDOG) is a cloud-based monitoring and analytics platform that provides real-time insights into an organization’s IT infrastructure, applications and logs. Developers, IT operations teams and business analysts use its software to identify and troubleshoot issues, optimize performance and improve user experience.
Datadog’s SaaS solutions collect, correlate and analyze data from multiple sources. The company’s platform is designed to provide a comprehensive view of an organization’s IT infrastructure, including cloud environments, on-premises servers and containers. It also integrates with over 600 technologies, providing a wide range of insights and alerting capabilities.
Analysts have been recommending the stock, expecting the recent foray into cybersecurity to expand its total addressable market (TAM) significantly. Of the 25 wall street analysts covering the stock, 20 have a buy rating. In addition, the average price target is $103.38 representing over 58% upside. That is not surprising, considering its perfect blend of growth and profitability. According to Cantor, Jan. 25 note:
“Datadog’s fundamentals earns top-tier status in the SaaS category, in our view, balancing top-line growth of ~61%, and operating margin profile at ~18%, and adjusted FCF margin at ~21%, all which translates into a Rule of 70+ name.”
As competition from rivals such as Grafana and Chronosphere emerges, Datadog is staying ahead by developing machine learning (ML) and artificial intelligence (AI) tools for performance monitoring. The company uses these technologies to automatically detect anomalies, identify performance issues and provide recommendations for optimization. For instance, Watchdog, its AI engine, uses machine learning for root cause analysis and security threat detection. This native cloud observability platform will participate in the ongoing digital transformation and cloud migration making it one of the best cloud computing stocks to buy.
Cloudflare (NYSE:NET) is a cloud-based cybersecurity and performance optimization platform that protects websites and applications from online threats and improves their speed and reliability. As Mathew Prince, the CEO, describes it, “The network you plug into and don’t have to worry about anything else.”
It has a global network of over 200 data centers in more than 100 countries. These data centers ensure fast and reliable performance for its customers. It also offers various cloud network and application services, including application delivery controllers, wide area network (WAN), content delivery network (CDN), load balancing, and intrusion detection and prevention. Secondly, its zero trust services provide a range of security solutions such as virtual private networks (VPNs), content filtering, privileged access management and data loss prevention.
Still, the company is entering new markets and expanding relationships to move up market. It continues to innovate and pursue incremental growth in areas such as the Internet of Things (IoT), serverless and database. For example, in September 2021, it launched Cloudflare R2 Storage, an inexpensive and reliable cloud-based data storage solution.
Regarding financial results, Cloudflare has been one of the fastest-growing cloud computing stocks. It grew revenues at a 49% CAGR between 2017 and 2022. Besides, it has maintained a strong dollar-based net retention above 120% in the last five quarters, a testament to its sticky cloud offerings. Although the company has a large revenue base, it expects a healthy revenue growth of at least 36% in fiscal year (FY) 2023. Overall, the company is growing responsibly. It has maintained non-GAAP gross margins above 78% over the last three years. Going forward, management expects to increase its operating margins from the current 6% as marginal costs for customer services decline.
This post originally appeared at InvestorPlace.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.