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7 Best Cloud Stocks to Buy

Wayne Duggan
·4 mins read

Economic disruption has boosted digital business.

The 2020 health crisis has severely disrupted global economies. While that disruption has been devastating for some businesses, it has been a shot in the arm for others. Analysts say the shelter-in-place environment has significantly sped up the digitization of the global economy, which has been a catalyst for cloud computing stocks. Bank of America analyst Kash Rangan recently examined cloud software stocks and identified many top picks that have benefited from either problems created by the pandemic or the accelerated long-term shift to a digital global economy.

Microsoft Corp. (ticker: MSFT)

Rangan says Microsoft has a large degree of exposure to five key cloud services growth themes: digital engagement; remote work; workflow planning; development and operations, known as DevOps; and e-commerce. He says Microsoft has five internal growth drivers as well, including Azure, commercial Office, gaming, LinkedIn and GitHub. Together, those five businesses are tapping into a total addressable market that will grow to $460 billion by 2025, according to Rangan. He is projecting double-digit long-term annual revenue growth and between $12 and $13 in earnings per share in fiscal 2025. Bank of America has a "buy" rating and $250 price target for MSFT stock.

Salesforce.com (CRM)

Salesforce.com is a customer relationship management software provider that offers platform-as-a-service, or PaaS. Rangan says Salesforce should gain market share in 2020 and be better positioned to benefit from a rebound in discretionary spending once the economy bounces back. While high unemployment is a near-term headwind, the pandemic has highlighted just how much companies not using Salesforce services are struggling, Rangan says. He is projecting that the cloud CRM market will grow 20% annually to $60 billion by 2023. Bank of America has a "buy" rating and $210 price target for CRM stock.

ServiceNow (NOW)

ServiceNow offers a suite of services aimed at automating a range of information technology department functions. Rangan says ServiceNow has become an even better investment as the company has built its network of partners and customers, creating momentum and potential for long-term growth of between 25% and 30% annually. He says companies without automated workflows are dealing with a mess, given that many employees were forced to transition to remote work nearly overnight. Access and collaboration are critical parts of a functional remote workplace. Bank of America has a "buy" rating and $440 price target for NOW stock.

Zoom Video Communications (ZM)

Zoom Video Communications is the market leader in videoconferencing. Zoom shares are up more than 300% year to date as companies have been forced into a work-from-home model. Rangan says Zoom will likely retain much of that business, given that companies are now familiar with Zoom's products and benefits. He says Zoom's expansion into voice/cloud private branch exchange could help grow its total addressable market to between $18 billion and $36 billion by 2023. Finally, Zoom still has opportunities to gain market share from legacy videoconferencing systems. Bank of America has a "buy" rating and $260 price target for ZM stock.

VMware (VMW)

Rangan says VMware is the "Swiss Army knife" of hybrid cloud as companies shift to containers -- standard units of software in cloud computing for packaging code -- and remote work. He says products like EUC, Carbon Black and VeloCloud are particularly well-positioned for the long-term digital transformation of the economy. Rangan says VMware has an opportunity to double its revenue to $20 billion because of gains in VMware Cloud, increases in security markets, network and storage, and growth projects Pacific and Tanzu. In addition, the company's Amazon Web Services partnership is gaining traction and generating triple-digit revenue growth. Bank of America has a "buy" rating and $175 price target for VMW stock.

Atlassian Corp. (TEAM)

Atlassian develops team collaboration tools for a digital workplace. Rangan says the company's product portfolio is extremely diversified, and its offerings are so flexible and easy to use that they are often adopted by nontechnical teams, including human resources and legal departments. Atlassian's unique business model has produced more than 30% annual revenue growth and 30% free cash flow margins, a rare combination. Rangan says Atlassian products are complementary to Zoom Video, Slack Technologies (WORK), Microsoft Teams and other videoconferencing programs. Bank of America has a "buy" rating and $198 price target for TEAM stock.

Splunk (SPLK)

Splunk is a software platform that specializes in collecting, storing, searching and analyzing machine-generated data. The more connected the business world gets and the more complicated IT departments become, the more big data will be generated and the more likely companies could become overwhelmed. Fortunately, Splunk is the king of big data, according to Rangan. He says the utility of Splunk Cloud in the current environment is obvious, given that the company's annual recurring cloud revenue was up 82% last quarter to $480 million. Bank of America has a "buy" rating and $208 price target for SPLK stock.

Cloud stocks to consider:

-- Microsoft (MSFT)

-- Salesforce.com (CRM)

-- ServiceNow (NOW)

-- Zoom Video (ZM)

-- VMware (VMW)

-- Atlassian Corp. (TEAM)

-- Splunk (SPLK)