Thanks to the proliferation of cloud computing stocks and underlying technologies, it’s easy to take this segment for granted. But these companies are powering the digital transformation, the integration of computer technology in all aspects of society. We’re not there yet. But with advances in various digitization solutions, including artificial intelligence, it’s probably only a matter of time.
In fact, Grand View Research reminds us that the global digital transformation market size will reach a valuation of $731.13 billion in 2022. Moreover, the analyst forecasts that the sector will witness a compound annual growth rate (CAGR) of 26.7% from this year to 2030. By the end of the forecast period, the industry could generate a total revenue of approximately $4.62 trillion. It is the primary economy in itself. Investors should therefore seriously consider adding these cloud computing stocks to their portfolios.
A multinational computer software company, Adobe (Nasdaq:Adobe) has historically specialized in programs for the creation and publication of various media content, including graphics, photography and animation. Having shifted the business model of its Creative Cloud suite of applications to Software as a Service (SaaS), Adobe is a strong player in the ecosystem of cloud computing stocks.
On a financial basis, ADBE stock cuts an attractive profile. For example, the company has a strong balance sheet, with an Altman Z score of 11.3, indicating very low bankruptcy risk over the next two years. Operationally, the company has benefited from his three-year revenue growth of 18.1%, outperforming his 72.5% in the software industry.
In terms of profitability, Adobe’s net profit margin is 26.32%. This stat beats 94.9% of its sector rivals. Moreover, its return on equity (ROE) is high at 33.65%, reflecting the quality of its business. Finally, Wall Street analysts see his ADBE as a consensus moderate buy. Their average price target is now $393.55, suggesting a potential upside of 5% or more.
Ranked as a top player in a wide range of technical fields, microsoft (Nasdaq:MSFTMore) has made significant inroads over the years as the first example of a cloud computing stock to buy. Primarily, it is difficult for students and professionals alike to navigate without a basic understanding of Microsoft Office programs. And the company, which is making the transition as a SaaS provider, already has a massive digital transformation.
Fundamentally, what makes MSFT attractive as a cloud computing stock is its financial resilience. First, the underlying company enjoys a stable balance sheet underpinned by an Altman Z-score of 8.86, reflecting very low bankruptcy risk. Operationally, Microsoft posted his 3-year revenue growth of 17.4%, beating his 71.29% for the sector player.
Also, its free cash flow (FCFMore) grew by 20.5% over the same period, above the sector median of 9.1%. What’s more, its net profit margin is just over 33% of his, dwarfing most of its rivals. Finally, a covering analyst pegs his MSFT as a consensus strong buy. Their average price target is $292.48, suggesting a near 6% upside potential.
An iconic legacy technology giant, IBM (New York Stock Exchange:IBM) initially sat on the laurel a little longer than it should have. As a result, several other cloud computing stocks have overtaken “Big Blue” and relegated it to a fairly irrelevant place. Today, IBM is the number one hybrid cloud computing company.
To be fair, IBM represents a riskier profile than the top two stocks in cloud computing. In particular, its balance sheet is characterized by moderate stability. Also, his Altman Z-Score of 2.81 puts him in the gray zone. The operating margin is up to 13.47%, but operationally we can take advantage of the improved earnings.
On the positive side, the market estimates IBM’s forward multiple at 13.49. Big Blue outperforms its competitors by 79.13% when it comes to projected revenue discounts. It also has a dividend yield of 5.1%. Finally, analysts see IBM as a consensus hold. However, the average price target is $143.56, suggesting an 11% upside potential.
cloud computing based data cloud enterprise, snowflake (New York Stock Exchange:snow) provides data storage and analytics services. Known as Data as a Service (DaaS), this business model allows enterprise users to store and analyze data using cloud-based hardware and software. Snowflake also stands out by facilitating rapid scalability for its clients.
Unlike established (but unlikely to rise) cloud computing stocks, Snowflake requires patience from investors. The following year, SNOW gave up nearly 43% of his share value. Despite this, the market still sets the SNOW forward multiple at 215.
That said, Snowflake enjoys significant strength on its balance sheet. For example, its cash-to-debt ratio is 15.93, better than the field’s 69%. It also has an 80% revenue growth rate over three years, which is sure to degrade over time. Moving on to expert valuations, analysts peg his SNOW as a consensus medium buy. Their price target averages $184.17, implying an upside potential of over 36%.
cloud security company Zuscaler (Nasdaq:ZS) provides enterprise cloud security services. So far this year, the market has responded moderately to the business, with ZS shares up almost 2%. However, the impact of 2022 technology has had a significant (and negative) impact on Zscaler. Unfortunately, the stock has fallen 53% in the last 365 days.
Nevertheless, for speculators, ZS could represent a high-risk, high-return opportunity among cloud computing stocks. Notably, Zscaler’s three-year revenue growth hit his 46.7%, beating his competitor’s 92.64%. Also, during the same period, his FCF growth rate was 93.7%, outpacing the sector at almost 96%. But that’s where the good news dries up: Zscaler’s profit margins are well below breakeven, raising concerns about its viability. On the balance sheet, the debt-to-equity ratio stands at 2.3x, well above the sector median of 0.22x.
Nevertheless, analysts see ZS as a consensus medium buy. Their average price target is $152.93, suggesting a near 37% upside potential.
Ring Central (RNG)
providers of cloud-based communications, ring central (New York Stock Exchange:RNGs) also offers collaboration products and services for enterprises. RNG stock has gotten off to a good start to the new year since mid-February, but things have gotten pretty volatile, so RNG has fallen nearly 21% since its January opener. Similarly, for subsequent years, it bled a staggering 77%.
Obviously, RNG is only suitable for those who want to gamble on cloud computing stocks. Moreover, the financial situation suggests that prospective investors should exercise extreme patience. For example, RingCentral is suffering from a deteriorating balance sheet. Not surprisingly, it fails to generate profits. Meanwhile, his three-year revenue growth at the company was 24.3%, ahead of his nearly 80% in the software industry. Also, the sector median is trading at 1.32 times his turnover, down 2.33 times.
Turning to the streets, analysts peg RNG as a consensus moderate buy. Their average price target is $50.57, suggesting an upside potential of over 77%.
Data Dog (DDOG)
Observability service for cloud-scale applications, data dog (Nasdaq:DDOG) provides monitoring of servers, databases, tools and services through a SaaS-based data analytics platform. It’s not as shaky as the RingCentral above, but it contributed more than its fair share of red ink. DDOG has fallen 9% since it opened in January. Over the last 365 days, it has decreased by 56%.
However, for those looking to swing for the fence, Datadog may attract speculators. Let’s get the bad news out of the way first. DDOG is grossly overvalued against the most common metrics such as projected revenue, turnover, and book value. In addition, the profit division is also struggling.
On the bright side, Datadog’s Altman Z-Score is 8.93, indicating very low bankruptcy risk. Also, his 3-year revenue growth rate is 27%, outpacing his competitors’ 82.59%. Finally, covering analysts peg DDOG as a consensus strong buy. Their average price target is $105.05, suggesting an upside potential of over 55%.
Josh Enomoto on publication date I did not have any positions (directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the subject author of InvestorPlace.com. Publication guidelines.