3 best cloud stocks to buy in December
The COVID-19 pandemic has accelerated the shift to the cloud for businesses large and small. After all, the public cloud offers more flexibility, access to the latest processors and technologies, and a host of other benefits.
However, recent fears about inflation have caused many leading cloud stocks to drop significantly. This is because cloud stocks are growing rapidly, with high valuations relative to today’s earnings, making them sensitive to higher interest rates.
Yet a significant market-wide pullback often means an opportunity to invest in leading companies with leadership positions and a bright future. The November fading therefore made these three cloud leaders big buys by 2022.
Believe it or not, the stock Amazon (AMZN -1.38% ) has done virtually nothing in the past year and a half. Yet could this long base lead to an explosive surge in 2022?
Investors have depreciated on Amazon this year due to difficult comparisons to the gains fueled by the 2020 pandemic. To some extent, those concerns were valid. Overall growth was disappointing in the last quarter, with online store sales only increasing by 3% and third-party seller revenues by just 18%, as they outperformed tough comparisons. In addition, supply chain bottlenecks have resulted in increased shipping and labor costs.
But while Amazon derives the majority of revenue from e-commerce, the Amazon Web Services (AWS) cloud platform is its primary profit center. Looking under the hood, AWS accelerated 39% from 37% in the previous quarter and 29% in the previous year period. Operating margins have exceeded 30%, despite Amazon’s heavy investment in growth.
These investments are also driving fantastic innovation, with AWS unveiling a slew of new products and services this week at its annual Re: Invent conference. Among the most interesting were AWS’s 5G private networks, which allow companies to set up their own private 5G networks for manufacturing facilities and even corporate campuses as a replacement for Wi-Fi. Other innovations included the latest versions of the Graviton internal processor designed by AWS and the Trainium deep learning chip. However, there were many, many more.
With e-commerce growth set to rebound in 2022 on easier comparisons and AWS pulling all cylinders, a big bounce from Amazon could be in sight.
A business partner close to AWS is the leader in cybersecurity CrowdStrike (CRWD -5.88% ). That’s because CrowdStrike is a next-generation cybersecurity company built in the cloud. This cloud-centric architecture gives CrowdStrike advantages over traditional vendors, as its centralized Threat Graph is able to take data from all of its customers to continuously train the company’s lightweight Falcon agent to ” prevent the latest cyber attacks. The more customers CrowdStrike wins, the smarter its platform becomes.
CrowdStrike increased this number of customers by 75% in the last quarter, which bodes well for the future. Subscription revenue grew 67%, as did annual recurring revenue (ARR) to $ 1.51 billion. Adjusted gross margin (non-GAAP) also increased by one percentage point to 79%. While earnings are still negative, CrowdStrike’s free cash margin was 32.4%.
These are impressive numbers, but CrowdStrike believes there is still a lot of room to develop. At the time of its 2019 IPO, CrowdStrike estimated its total addressable market (TAM) at $ 25 billion; however, it now sees that number grow to $ 67 billion by 2024, thanks to the industry’s migration to the cloud, innovation in its core endpoint protection products, and a host of targeted acquisitions. And management predicts the TAM could reach $ 116 billion by 2025, given its product roadmap and future initiatives.
With around 30 times annual recurring revenue, CrowdStrike doesn’t exactly come cheap. Still, after a recent 30% drop, maybe it’s time to consider this disruptive industry leader with a highly profitable business model and a long trail for growth.
While Amazon invented the concept of cloud computing and CrowdStrike is a cloud-native disruptor, Splunk (SPLK -2.32% ) is a legacy software company currently making the transition to the cloud. Despite its late move to the cloud, Splunk is still a leader in IT observability, data monitoring, and cybersecurity.
Due to the change in business model, Splunk trades at a relatively low price. The stock is down about 47% from all-time highs and is trading around 6.5 times its annual recurring income. Making investors even more nervous, the company recently announced that its CEO Doug Merritt would step down after six years of service.
So why would anyone buy Splunk in the midst of all the uncertainty? Mainly because companies’ transition to the cloud seems to be going pretty well. In the last quarter, annual recurring revenue jumped 37%, but cloud ARR, which still represents a minority of total ARR, grew even faster by 75%, accelerating from the previous quarter. 68% of Splunk’s new software bookings were cloud-based, up from 54% in the previous quarter. And although the cloud currently has gross margins below the company’s overall margins, Splunk’s cloud gross margin increased four percentage points from the previous quarter to 64.7%. The company is also on track to generate positive operating cash flow in fiscal 2022 for the first time since fiscal 2019, showing the transition is working.
Basically, despite all the nervousness over this transition and the search for a new Splunk CEO, the company appears to be performing at a high level. As cloud growth eventually overtakes legacy on-premises activity, look for overall business growth that remains strong, if not accelerating. With such a low valuation relative to other cloud peers, Splunk is looking for value stock, if you can call it that, in an otherwise expensive industry.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.