5 Cloud Computing Stocks to Take the Market by Storm in '16
Zacks Equity Research
Updated
Cloud computing has totally transformed the way organizations operate and professionals access technology resources. In less than a decade, the move to the cloud has revolutionized the entire IT sector. Companies are now moving away from hardware and licensed software purchases towards software-, platform- and infrastructure-as-a-service (SaaS, PaaS and IaaS).
Before getting into the growth prospects, it might be helpful to understand what exactly cloud computing represents.
What Is Cloud Computing?
Cloud computing is a flourishing part of the technology space and has been gaining momentum in recent years. It is a process by which data or software is stored outside of a computer and is accessible from anywhere at any time via the Internet. This revolutionary idea can lower IT costs of companies by cutting down the need for servers and staff.
Initially used in telephony schematics to hide irrelevant details, the cloud symbol now represents the Internet in computing diagrams. The fundamental notion of cloud computing dates back to 1950, but it was in 2006 that the term was popularized by Amazon.com Inc. AMZN.
The exponential growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals compelled several companies to turn to cloud computing vendors.
There is also an ongoing revolution in the way people use devices and communicate with each other, which is leading to the proliferation of mobile devices by consumers. The convenience and accessibility afforded by mobile is also driving employers across many sectors to move toward the Bring-Your-Own-Device (“BYOD”) policy. However, the nature of work differs across organizations and broader adoption of the policy can only be possible be leveraging the cloud.
Cloud Computing Trends to Watch For
According to a recent Forbes article that gathered data from research firms such as International Data Corporation, Forrester, Gartner, Ovum, Wikibon and others, the global SaaS marketing will grow to $67 billion in 2018 from $49 billion in 2015. The article also indicated that IaaS spending would be $16.5 billion in 2015, a growth rate of roughly 33% from 2014.
According to Centaur Partners, Software-as-a-Service (SaaS) and cloud-based business applications are likely to grow from $13.5 billion in 2013 to $32.8 billion in 2016, reflecting a compounded annual growth rate (CAGR) of 19.5%.
Another research firm, IDC projected last year that public IT cloud services spending will grow at a five-year CAGR of 22.8% to over $127 billion in 2018. The growth rate is six times that of the broader IT market. In 2018, public IT cloud services will make up more than 50% of global software and storage development.
5 Cloud Stocks Poised to Grow
The cloud computing space has several promising stocks to choose from. Here are a few interesting long-term investment options for those interested in the space.
With the help of our style score system, we have shortlisted stocks that hold immense growth potential. Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) offer the best investment opportunities in the growth investing space.
Amazon.com, Inc. AMZN
Seattle, WA-based Amazon.com, Inc. is one of the largest online retailers, with extensive operations in North America and expanding operations across the globe. The e-commerce giant has emerged as a key player in the cloud computing space with its Amazon Web Services (AWS).
Revenues from the AWS segment have been growing strongly and crossed the $5 billion mark over the trailing 12 months. Even more encouraging is the fact that AWS generates much stronger margins than the traditional retail business, which should help the company’s profitability, going forward.
The Zacks Rank #2 stock has a Growth Style Score of ‘A’ and long-term expected earnings growth rate of 35.6%, much higher than the industry average of 18.3%.
salesforce.com, inc. CRM
Headquartered in San Francisco, salesforce.com is the leading provider of on-demand Customer Relationship Management (CRM) software, which enables organizations to better manage critical operations, such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development. Founded in 1999, Salesforce began offering its on-demand application service on a subscription basis in Feb 2000.
Salesforce has a Zacks Rank #2 and a long-term expected earnings growth rate of 26.2%, significantly higher than the industry average of 16.6%. The company has a Growth Style Score of ‘B.’
Facebook, Inc. FB
Incorporated in Jul 2004 and headquartered in Menlo Park, CA., Facebook Inc. through its web-based portal helps in creating and fostering social networks. Facebook helps users exchange messages, post pictures, play social games, listen to music, watch movies and interact with their favorite brands.
The company currently carries a Zacks Rank #2 and has a long-term EPS growth rate of 27.4%, which is higher than the industry average growth rate of 17.5%. Facebook has a Growth Style Score of ‘B.’
Microsoft Corporation MSFT
Redmond, WA-based Microsoft is one of the largest broad-based technology providers in the world today. Although software is the most important revenue source, the company’s offerings also include hardware and online services. Additionally, Microsoft offers support services in the form of consultation, training and certification of system integrators and developers. The company reports revenues in five separate segments, each of which targets a specific user group.
Microsoft has a Zacks Rank #3 and has a Growth Style Score of ‘A.’ Moreover, over the last 60 days, three of the 2016 estimates moved north to raise the Zacks Consensus Estimate by 1% to $2.73 per share. The expected long-term growth rate for the stock is 9.1%.
Rackspace Hosting, Inc. RAX
As the world's leader and specialist in hosting, Rackspace Hosting is changing the way businesses worldwide buy IT. Rackspace delivers computing-as-a-service, integrating some of the industry's best technologies into a flexible service offering thus making computing more reliable and affordable. It is worth mentioning that in Oct 2015, Rackspace entered into a strategic partnership to support Amazon.com’s Amazon Web Services (AWS).
This partnership will be beneficial as the rivals can leverage each other’s resources. It will also ensure tighter integration between the two clouds and help customers to easily and securely move data between the two platforms.
Rackspace has a Zacks Rank #3 and a long-term expected earnings growth rate of 19.6%, higher than the industry average of 17.5%. The company has a Growth Style Score of ‘A.’ Moreover, over the last 60 days, most of the estimates moved upward to raise the Zacks Consensus Estimate by 7.2% to 89 cents per share for fiscal 2015.
Conclusion
Cloud computing has always been about scale, though earlier, it was limited to companies expanding the infrastructure to cut prices and expand capacity. Now it appears that cloud computing has entered a new phase where the focus has shifted to product offerings and those with the widest range will win. Therefore, companies are aggressively investing to enhance their cloud capabilities and achieve long-term goals.
So for investors who are keen on playing this thriving cloud computing space, these above-mentioned stocks are worth considering.
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