3 “Strong Buy” Cloud-Based Software Stocks

As more and more businesses go digital, cloud-based software providers stand to reap the benefits. A cloud refers to networks comprised of hyper-scale data centers built using open-source software and commodity hardware.

With the demand for cloud-based solutions only growing, enterprises are turning to software companies to provide the digital infrastructure they need to keep pace with a world that’s increasingly online.

But how are investors supposed to know which stocks are poised to soar beyond the clouds? One way to find these stocks is by using the TipRanks Stock Screener. The Stock Screener lets you sort stocks by sector and analyst consensus to pinpoint the most compelling investments.

Using this tool, we were able to find 3 cloud-based software stocks that have garnered substantial support from Wall Street with a “Strong Buy” analyst consensus. This is based on the last three months’ worth of ratings from all other analysts.   

Let’s dive in.

Salesforce.com, Inc. (CRM)

As the pioneer behind customer relationship management (CRM) software, Salesforce has cemented its status as one of the leading players in the space.

Based on its solid performance in its most recent quarter, investors are liking what they’re seeing. On August 22, the company posted a second quarter earnings and revenue beat driven by the strength of its Sales Cloud and Service Cloud. Sales cloud, the company’s largest product, generated $1.13 billion in revenue while the Service Cloud reached $1.09 billion, up 13% and 22%, respectively, from the year-ago quarter.

That being said, CRM has been branching out as part of a larger effort to diversify its product offerings.

Back in 2018, CRM acquired Mulesoft’s software business for $6.5 billion. The deal allowed CRM to offer solutions using data stored in disparate systems, some in the cloud and some in legacy on-premises software.

This was followed up by an even larger acquisition of data visualization company Tableau. At $15.3 billion, the purchase was the company’s largest acquisition in its history.

While some investors originally expressed concern that CRM was biting off more than it can chew with the acquisition, RBC Capital analyst Alex Zukin believes the current valuation of 5.5 times enterprise value to expected 2021 revenue represents a unique opportunity. “We see little meaningful competition and no evidence of pricing pressure or market saturation at Salesforce,” the five-star analyst explained. As a result, he assumed coverage with a Buy while raising the price target from $181 to $200 on August 23. He believes shares could surge 32% in the next twelve months.

Wall Street clearly agrees as CRM has received 26 Buy ratings and no Holds or Sells in the last three months, giving it a ‘Strong Buy’ analyst consensus. Its $188 average price target indicates 24% upside potential.

ServiceNow Inc. (NOW)

While not as well-known as CRM, ServiceNow has been deemed a must-watch name in the workplace software space. Its cloud-based solutions get rid of paperwork by enabling its customers to digitize manual business processes that have typically needed to be performed on paper. With shares already up 48% year-to-date, it’s easy to see why analysts are excited about this cloud stock.

Throughout the company’s history, it has been able to garner a positive reputation among customers based on its easy-to-use design. It doesn’t hurt that the software can be integrated with its customers’ existing software such as Amazon Web Services (AMZN), Microsoft Azure (MSFT), Google Cloud (GOOGL) as well as several others.

According to NOW’s July 24 Q2 earnings release, customers are happy. The company boasts an almost 99% renewal rate, with it consistently marketing and cross-selling its other products to existing customers.

Not to mention NOW was able to finalize 39 transactions each with more than $1 million in net new annual contract value (ACV) during the quarter. This brings its total customer base with an AVC over $1 million to 776, up 33% year-over-year.

While the company has taken some heat over its lofty valuation, Stifel Nicolaus analyst Tom Roderick believes NOW looks poised to grow into its valuation. As a result, he upgraded the rating from a Hold to a Buy and bumped up the price target from $290 to $320 on August 21. The five-star analyst's new price target demonstrates his confidence in NOW’s potential to gain 21% over the next twelve months.

All in all, the rest of the Street is bullish on NOW. It boasts a ‘Strong Buy’ analyst consensus and a $317 average price target, suggesting 20% upside potential.

Q2 Holdings Inc. (QTWO)

Q2 Holdings wants to change the way financial institutions operate by providing cloud-based digital banking solutions.

The company is aiming to meet the needs of smaller banks that are seeing a drop in customer engagement at their physical locations. QTWO allows customers to build custom websites or mobile apps through its three platforms, a digital banking platform, lending and leasing and a banking-as-a-service.

QTWO’s strategy appears to be working as evidenced by the results from its most recent quarter. On August 7, the company reported that its customer base gained 19% from the year-ago second quarter to reach 13.6 million users across all platforms. As a result, quarterly revenue totaled $77.6 million, up 33% year-over-year.

“We closed out the first half of the year on a strong note. Given our sales execution, we plan to continue investing in integration, innovation and delivering successful client outcomes,” said CEO Matt Flake.

Adding to the good news, QTWO announced on August 29 that it is partnering with Athena Home Loans to provide digital mortgages.

Based on QTWO’s strong second quarter performance, KeyBanc analyst Arvind Ramnani reiterated his Buy rating while raising the price target from $98 to $102 on August 28. The four-star analyst believes that shares could soar 17% in the next twelve months.

Wall Street appears to echo the analyst’s sentiment. The stock is a ‘Strong Buy’ among analysts, with it receiving 6 Buy ratings vs 2 Holds in the last three months. Its $94 average price target implies 7% upside potential.

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