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5 Cloud Stocks to Buy as Microsoft Soars

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On Friday, Microsoft Corporation (MSFT - Free Report) bettered its last record close achieved in Dec 1999, back during the dot-com era. Encouraging first quarter earnings results lifted the software major’s shares higher. Rising demand for cloud software and services were the primary reason for this spectacular performance.

These results once again underline the growing importance of the cloud. Stocks gaining from the cloud computing phenomena make for attractive options at this point. Adding them to your portfolios would make for a prudent choice.

Azure Boosts Microsoft’s Results

Microsoft’s first-quarter fiscal 2017 earnings of 76 cents per share surpassed the Zacks Consensus Estimate of 68 cents. Revenues of $22.33 billion increased 3.1% from the year-ago quarter and exceeded the Zacks Consensus Estimate of $21.54 billion.

The high point of these results was revenue from Azure, which soared 121% year over year, with Azure compute usage doubling. Microsoft is benefitting from its hybrid and hyperscale cloud, which spans multiple jurisdictions. This makes it ideal for multinational companies and banks that have operations all over the world and are required to be in compliance with laws of the countries in which they operate.

This is the reason Microsoft cites which has drawn 80% of the world’s largest banks to Azure. Moreover, the company’s expanding cloud services have also helped it to capture big customers like Boeing (BA - Free Report) , Rolls-Royce, Schneider Electric and Facebook . (Read: Microsoft (MSFT - Free Report) Beats Q1 Earnings on Strong Cloud Growth)

Cloud’s Prospects Remain Strong

According to a study by non-profit association CompTIA released last month, most companies are continuing to make major investments related to the cloud. More than 90% of the companies surveyed utilized some form of cloud computing. However, businesses are also becoming more selective in the kind of cloud technology which are they choosing adopt. 

Meanwhile, the primary motivation behind adopting cloud computing technology is the associated cost reduction. The survey revealed that 44% of medium businesses, 47% of larger companies and 41% of the small businesses which were part of the survey believed that cost reduction was a more important reason for implementing cloud technologies compared with others, such as increased speed, lesser complexity and modernization.

The most encouraging finding of the survey was that most of these companies were utilizing cloud solutions for a period of one to five years. Of these, only 6% were using such solutions for five years. In contrast, 23% of the companies were using such solutions for a period lesser than a year. This indicates that despite signs that the cloud market may be maturing; the sector’s growth potential remains intact.  

Our Choices

The fact that Azure’s performance is a major reason for Microsoft’s encouraging results serves to underscore the growing importance of the cloud computing market. A recently released survey indicates that the prospects for this sector still remain bright.  

This is why it may be a prudent option to pick stocks which can gain from this phenomenon. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Ciena Corporation (CIEN - Free Report) is a provider of optical networking equipment, software and services.

Ciena Corporation has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 18.8% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 18.23, lower than the industry average of 20.98.

Amazon.com Inc. (AMZN - Free Report) is the leading provider of cloud infrastructure as a service to enterprise customers. The Amazon Web Services (AWS) business as it is called generated revenue of $2.56 billion in the last quarter, growing at over 60% year over year in each of the last four quarters.

Amazon has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 1.6% over the last 30 days.

Barracuda Networks, Inc. is engaged in designing and delivering security and storage solutions.

Barracuda Networks has a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 59.4% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cisco Systems (CSCO - Free Report) is the largest player in the networking space. Its growth prospects remain positive because of the drive toward cloud computing and increasing data flow on carrier and computing networks.

Cisco has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 4.2% for the current year. It has a P/E (F1) of 13.53, which is lower than the industry average of 19.10. Its earnings estimate for the current year has improved by 0.2% over the last 30 days.

Advanced Micro Devices, Inc. (AMD - Free Report) is the second-largest producer of microprocessors. On Oct 14, AMD announced a partnership with online retail giant Alibaba for the supply of Radeon Pro GPUs for its cloud services.

Advanced Micro Devices has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 56.1% for the current year. Its earnings estimate for the current year has improved by 0.9% over the last 30 days.

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