Cloud computing is critical to the future of tech and investing in well-positioned cloud stocks in this rapidly advancing space will boost your portfolio’s long-term potential.
The global pandemic has illuminated the importance of cloud computing. With the world working from home, businesses are relying on this technology more than ever.
Cloud technology was a $227.8 billion market in 2019 and is anticipated to grow by a compounded annual growth rate (CAGR) of 16% over the next 3 years, according to Gartner’s research, which can be summarized in the table below.
Software as a service (SaaS) is the largest cloud market because of its accessibility and scalability as a subscription-based model. This model is becoming the gold standard among software firms, giving these companies a consistent, sustainable revenue stream instead of just a one-time sale.
The cloud-based subscription model is also advantageous to customers, giving them a tremendous amount of flexibility. Customers have a lower upfront cost, ability to cancel at any point, and allows them access to the most updated software wherever they have an internet connection.
My favorite names in this space include Salesforce (CRM - Free Report) , HubSpot (HUBS - Free Report) , and Adobe (ADBE - Free Report) . Below I will break down each of these stocks and the potential they hold for your portfolio.
Salesforce (CRM - Free Report)
Salesforce dominates the customer relationship management market and now provides a cornucopia of enterprise cloud functionalities from automated marketing to business analytics. The company’s recent $15.7 billion acquisition of Tableau made Salesforce a leader in AI-driven analytics.
Salesforce has become an all-encompassing enterprise cloud powerhouse. No competitors can match the firm’s broad capabilities and flexibility. CRM is a borderline mega-cap stock that has demonstrated consistent profitable growth with its topline surging over the past 5 years at a compounded annual growth rate (CAGR) of 26%.
Salesforce is well capitalized with $7.95 billion in cash & equivalent, which is more than enough to cover its next 5 years in obligations. The firm has also been able to produce annually appreciating free-cash-flows ($3.7 billion in 2019), giving the company an immense amount of financial flexibility for acquisitions and internal investments.
Salesforce is an essential part of the enterprises’ work-from-home initiative and will likely be one of the last services that companies will get rid of. CRM is here to stay, and 26 out of 27 analysts are calling this stock a strong buy now.
I am waiting for this stock to fall below $150 to pull the trigger on more shares.
HubSpot (HUBS - Free Report)
HubSpot is like Salesforce’s little brother, offering a very similar product but in a much different way. HubSpot provides to Main Street what Salesforce provides to Wall Street.
HUBS is a leader in cloud-based enterprise software for SMBs, providing functionality in sales, market, and service management. The platform is more affordable and easier to implement than the complicated Salesforce system, which typically requires a professional to set up.
HUBS has proven its ability to demonstrate consistent topline growth while successfully expanding margins with scale. HubSpot is a young enterprise but has already acquired more than 73,400 customers in over 120 different countries.
This business has been growing fast, demonstrating a topline CAGR of 42% over the past 5 years and margin improvements quarterly. HubSpot is well capitalized with $967 million in cash & equivalents, which more than makes up its total liabilities.
HUBS is a higher risk/reward play than CRM because of the inherent uncertainty associated with Main Street right now. Small businesses are under the gun amid this global pandemic, and analysts are concerned that there won’t be enough of them left post-pandemic for HubSpot to have a sizable addressable market.
Diamonds are made under pressure, and I think that we will see new innovative small businesses come out of this economic slowdown. Small businesses realize how important it is to be digitally equipped in sales, marketing, and customer service. HubSpot is the go-to SMB name for this functionality, with its word-of-mouth sales speaking for themselves
HUBS is more than 25% of its all-time highs, and I am confident that this stock will come out of this market downturn stronger than ever. 14 out of 19 analysts are calling HUBS a buy right now.
Adobe (ADBE - Free Report)
Adobe is a legacy software player that has been able to stay ahead of the innovative curve for decades. Adobe was able to transition its essential business software to a cloud-based offering successfully.
The enterprise was an early mover on cloud computing, which has propelled ADBE shares to continuously new highs. These shares have outperformed the S&P 500 by almost 10-fold in the past 5 years, and I expect this relative outperformance to continue as this trailblazing tech giant continues to expand.
Adobe’s subscription-based business model has allowed the company to grow its sales quarter-over-quarter for more than 5 years. Expanding revenues by more than 20% while producing large growing profits is a feat that very few companies can claim.
ADBE has fared quite well throughout the pandemic, with its shares up 5.5% in 2020. This stock is not trading at any sizable discount, but still makes an excellent long-term buy for any portfolio. Considering the market’s recent volatility, I may wait for a pullback before I pull the trigger on ADBE.
I am waiting until these shares come closer to the $300 level before I buy any more ADBE shares.
Cloud computing is going to be a driving force in our future economy as it becomes progressively more essential for businesses to remain competitive. The three SaaS stocks I discussed above are well-positioned to outperform the market and would make an attractive addition to your portfolio of the future.
I will examine IaaS, PaaS, and cloud management & security services in subsequent articles.