Many investors still don’t understand what a cloud even is, let alone a cloud computing stock. Clouds are networks of hyper-scale data centers, built with commodity hardware and open-source software, that enable the creation of scaled, global services delivered over the internet. Still, figuring out which cloud computing stocks to buy requires a big-picture look at the top companies.
I divide cloud stocks into three types:
Cloud Czars, the owners of the biggest data centers, which now dominate the global economy. Cloud ServiceCompanies, which these clouds (and other, smaller ones) to deliver scaled services to consumers and businesses, selling them by subscription. Cloud Retinue, companies that serve the cloud with products or services essential to maintaining the resource.
During most of 2018, it was the Czars that dominated the market, but most have had a lousy second half of the year. You know them well by now — Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB). Among these five companies are $3.5 trillion in market cap.
That’s the problem with the Czars. People fear them. Politicians want them broken up, or at a minimum they want them bound by expensive regulations, and this will continue to hurt the stocks.
Cloud service companies use cloud connectivity provided by another company in their business model. Think Netflix (NASDAQ:NFLX) or Salesforce.com (NASDAQ:CRM). They may serve either businesses or consumers. They use the economics of the cloud to reach global markets, replacing products like DVD players or corporate data centers. The best offer applications that were previously unimaginable.
The cloud retinue is a term I created for this story. These are the suppliers of hardware, software and services to both the Cloud Czars and big customers now adapting to the reality of the cloud. Intel (NASDAQ:INTC) is part of the cloud retinue. So is Dell Technologies (NASDAQ:DVMT). Cloud retinue companies may also serve other markets, but it’s largely the cloud they’re pointing to for the future, which is what makes them the top cloud computing stocks to buy.
Beyond these obvious choices, the cloud retinue includes data centers that connect clouds to one another and companies that deliver essential software as a service to both the public clouds of the Czars and the thousands of private clouds now replacing corporate data centers.
The retinue may offer the best gains of any group in 2019 because they can fly under the radar of casual investors while delivering fat returns.
In this gallery, you’ll find examples of all three types of cloud computing stocks. It’s not an exclusive list by any means, and it may also become very misunderstood because everyone in 2019 will want to call themselves a cloud play.
Adobe Systems (ADBE)
By the standards of technology companies, Adobe Systems (NASDAQ:ADBE) is ancient, having been founded back in 1982, when I still had a full-time job, making it one of the oldest cloud computing stocks to buy.
What made Adobe one of the cloud service stocks to buy was a decision by CEO Shantanu Narayen, early in this decade, to move the company’s operations entirely to the cloud. Popular tools like Adobe Photoshop became part of the company’s Creative Cloud.
What sent Adobe stock into overdrive was its marketing cloud, used by sales teams, and its experience cloud, used to design Web sites and direct people through them, based on data. These are essential tools if you want to compete with a giant online store such as Amazon, or even just stay in the game against it.
Adobe shares were up 26% for the year and had been up over 50% until tech wrecked in October. Adobe’s success is no secret, so the stock is pricey, selling for nearly 15 times its 2017 sales of $7.3 billion, and 49 times earnings.
Adobe may come under pressure in 2019 as the market turns toward value and away from growth but consider this. While the company’s revenue has been growing at 25% per year, net income has been growing at 45% per year.
What keeps Amazon on the buy list for 2019 is partly the spectacular drop, starting in October 2018, that shaved over 20% off the stock’s price, and partly its incredible prospects as it keeps finding new businesses to dominate.
For people who are under 30 and want to own an index fund, Amazon is one of the most compelling cloud computing stocks to buy for long-term gains.
We think of Amazon as a retailer, but it’s Amazon Web Services that is its secret sauce and makes this one of the best cloud computing stocks to buy. Amazon was the first to re-sell its cloud. It still dominates the market for cloud infrastructure, and the businesses using that infrastructure, like Netflix, continue to grow like weeds.
Some bearishness has crept into Amazon due to its enormous power and struggling HQ2 process, leading many to call for breaking it up. But you can’t. Hundreds of thousands of small merchants depend on Amazon’s fulfillment services to compete with Walmart (NYSE:WMT), which remains more than twice as large as Amazon. These merchants would rise as an army if any serious move were made against it.
Amazon can now depend on getting about $12 billion per year from doing nothing. That’s what its $119/year Amazon Prime offering of free shipping brings in before it ships a single order or downloads a single movie, and while Amazon does offer free Prime content, it also re-sells others’ movies and streaming services, including Netflix. Amazon’s tentacles are now reaching around the world, to Asia, Europe and beyond.
What makes Amazon more exciting for 2019 are the rise of new services. Some of them were inspired by its Chinese doppelganger Alibaba (NASDAQ:BABA) — its growing move into finance — while others came from more prosaic concerns like healthcare.
Its purchase of Pillpack in 2018 makes it a pharmacy, and its joint venture with Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) and JPMorgan Chase (NYSE:JPM) could quickly make it one of the nation’s largest health insurers — the three companies have over 1 million employees between them.
With the acquisition of Red Hat (NYSE:RHT) by IBM (NYSE:IBM) expected to close in 2019, Cloudera (NASDAQ:CLDR) becomes the closest to a pure-play open source company on the U.S. stock market. It is a key member of the Cloud Retinue, the companies serving clouds with hardware, software and services.
Cloudera was formed around Hadoop, a data analysis system created in the last decade by a team under data scientist Doug Cutting. Cloudera struggled early in this decade because support doesn’t sell when customers have more people working on your software than you do.
Cloudera is finally gaining traction by selling its software as a service for machine learning and data analysis. It can analyze data sets exceeding 50 Petabytes in size — that’s 1 million gigabytes. The company is also buying its largest competitor in the Hadoop space, Hortonworks (NASDAQ:HDP).
Between them, Cloudera and Hortonworks had revenue of over $600 million last year, and a combined market cap of about $3.1 billion. The companies should do a combined $800 million in business during 2018, so the price to sales ratio looks like a bargain.
They’re cheap because neither partner in the merger is yet profitable, but their combined size could make them a tasty morsel for a larger cloud company in 2019, like Dell Technologies, IBM or even Microsoft.
Equinix (NASDAQ:EQIX) is a data center REIT. That means it runs data centers, used by the Czars to connect their clouds, and by many enterprises to house their private clouds. It is organized as a Real Estate Investment Trust (REIT), just like those owning commercial real estate or hotels, and is thus structured to send most of its profits back to shareholders in the form of dividends.
Over the last year, that meant $9.12 of dividends were paid for each Equinix share. The dividends have grown nearly 50% over the last five years, while the stock’s value has risen 141%, to a market cap of $31.2 billion.
For the cautious cloud investor, a data center REIT is a great place to play for 2019, because the business is still growing and you’re getting maximum dividends. Equinix competes with such companies as CoreSite Realty (NYSE:COR), CyrusOne (NASDAQ:CONE) and Digital Realty Trust (NYSE:DLR), most of which were built on a real estate platform rather than a tech platform.
In addition to handling connections between clouds, data centers like Equinix also host cloud equipment, expanding tits geographic footprint.
Equinix was founded in 1999 as a “co-location center,” a neutral site where companies like Verizon Communications (NYSE:VZ) might park computing equipment and connect it with private clients on its network. It didn’t take the REIT form until 2015. In May 2017 Equinix completed the purchase of Verizon’s data centers.
FireEye (NASDAQ:FEYE) lives in one of the hottest and fastest-changing cloud niches — security. It competes with such companies as Palo Alto Networks (NASDAQ:PANW), Fortinet (NASDAQ:FTNT) and CyberArk Software (NASDAQ:CYBR), as well as more established networking players like Cisco Systems (NASDAQ:CSCO) and traditional security outfits like Checkpoint Software (NASDAQ:CHKP).
Source: David via Flickr (Modified)
FireEye is considered a “next generation firewall” company, selling its FireEye Cloud Security as a service to governments, corporations and other large enterprises. In addition to offering firewall services and corporate identity protection, the company also investigates threats. It is among the fastest-growing computer security companies.
While other sectors of the cloud computing market fell hard in October, computer security companies like FEYE remained strong. Its market cap of $3.5 billion buys you over $800 million in 2018 revenue, but as with many other companies in the space, it must invest continuously to stay competitive and only became profitable in the third quarter of 2018, earning six cents per share.
FEYE has over $1 billion in cash and short-term securities on its books, enough to pay off its long-term debt with room to spare. It consistently has been cash-flow positive. There are no guarantees in this part of the market, but FireEye has gained a solid foothold as one of the better cloud computing stocks to buy. With a market cap of just $3.5 billion, it could also become a takeover candidate.
Intuit (NASDAQ:INTU), like Adobe, began life selling packaged software for PCs, but now sells that software mainly by subscription. The ongoing connections with customers have also brought it into other areas of finance, like Quicken Loans, which was spun out in 2002.
Given the fact that taxes and accounting are its main business, Intuit revenues retain some seasonality, with almost half its sales coming in its quarter ending in April. For its 2018 fiscal year, which ended in July, this meant revenue of $5.96 billion, of which $1.21 billion flowed to the net income line. Its market cap is over $51 billion.
Intuit’s move toward the cloud remains a work in progress, but its strength in the accounting niche has let it move at the pace of its customers, many of them small businesses and householders who aren’t computer savvy.
The fastest-growing part of the business is Mint, an online financial services operation first launched in 2006. Mint is used for budgeting and offers Intuit the opportunity to partner with other financial service companies, including wealth management companies. Integration with these companies, meant to make forms easier to complete, help Intuit expand its niche.
The move into the cloud has delivered shareholders a gain of 177% in their shares over the last five years and delivered a steady stream of dividends that have also doubled in that time. Intuit’s size and its middle-class niche could make it a great acquisition for a bank or a Cloud Czar, but meanwhile, among the top cloud computing stocks to buy, it’s a good defensive play because taxes are one of the two inevitabilities of life.
Microsoft (NASDAQ:MSFT) has become the strongest and least controversial of the Cloud Czars because its Azure cloud is mainly used to sell and develop software. Still it is easy to see why this is one of the safest cloud computing stocks to buy.
Microsoft is best known for its Windows operating system and Office applications. Both are now updated exclusively online, but it also delivers software through Azure for hundreds of other companies. In the process of building Azure, Microsoft has also buried the hatchet with the open-source movement. Among its 2018 acquisitions was GitHub, the largest open-source repository.
Microsoft was late to becoming a Cloud Czar, having committed to the platform only in 2014 upon naming Satya Nadella its CEO. Since then it has built a network that will soon cover every continent, including Africa. This means it has increased its capital budget to over $13 billion in 2018, from $8.9 billion just two years ago.
Microsoft has become a growth company again. Revenue has been growing north of 12% for the last three years. Now that it appears to have permanently crossed the trillion market gap mark, if I could own only one Cloud Czar, it would be Microsoft.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, AMZN, BABA and MSFT.
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