After a tumultuous summer, history says we might be due for a rally into year-end. According to Ryan Detrick at the Carson Group, when stocks fall more than 1% in August and September, they usually see a bounce in October.
Overall, software-as-a-service (SaaS) stocks have done well this year. And the outlook is still favorable given the productivity gains and efficiencies these solutions drive in organizations. Indeed, services offered by cloud computing stocks have become a critical component of today’s enterprises.
Compared to other industry groups, cloud computing stocks are growing revenues at a higher rate. And despite the shaky macro outlook, analysts expect these companies to grow earnings next year. Notably, they have catalysts like artificial intelligence that will deliver ongoing growth.
Despite headwinds, such as the upcoming Federal Reserve rate decision, these stock predictions have fundamental catalysts. If the market rallies, they could be leaders that can outperform.
Smartsheet (SMAR)
A concept image of a person holding a phone with various icons representing software-as-a-service companies.
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Founded in 2005, Smartsheet (NYSE:SMAR) offers a SaaS solution for modern work management that doesn’t require coding capabilities. Through its platform, teams of all sizes create processes and programs that suit their unique needs. Its cloud-based software has been popular due to its ease of use. Impressively, the company counts over 80% of Fortune 500 companies as customers.
After a 15% pullback in Q3, SMAR stock is ready for a fourth-quarter jump. Considering the solid fundamentals and undemanding valuation, it wouldn’t take much for the stock to rally.
First, let’s look at the fundamentals for one of the fourth quarter’s stock predictions. Over the last five years, the company has grown revenues at a 43% compounded annual growth rate. Second quarter results marked another excellent quarter, with the company delivering 26% year-over-year (YOY) revenue growth.
Looking at the underlying metrics driving growth, Smartsheet is in great fundamental shape. Customers with annualized contract values of $100,000 or greater grew 36% YOY. Meanwhile, dollar-based net retention rate, a measure showing revenue generated from existing customers, was 121%. Indeed, the company isn’t having problems generating more revenues from existing customers.
The company’s platform is best-in-class. Gartner ranked it the top customer’s choice in the collaborative work management category. This recommendation is fitting considering the company currently has over 9,400 customers with more than 2,000 employees.
With solid demand and the best product in the category, Smartsheet is poised for more growth. Upcoming features like AI Assistant and AI Solution Builder will only make its cloud-based work management market software more valuable.
Paycom Software (PAYC)
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Since reporting Q2 earnings, Paycom Software (NYSE:PAYC) has been under immense pressure. In two months, the cloud-based human capital management provider has tumbled from $370 to below $260. Currently, it is extremely oversold and due for a bounce.
Despite the considerable drawdown, it’s still one of the top cloud computing stocks to own. First, it ranks among the most profitable SaaS companies. The firm has maintained operating margins above 25% since fiscal year 2016. Moreover, free cash flow per share has grown from $0.47 in FY2015 to $5.11 in the last fiscal year.
The company has achieved these stellar margins while maintaining a high growth rate. Over the past five years, the company achieved a revenue CAGR of 25%. Revenues grew 25% and 30% in 2021 and 2022, respectively.
Looking at the historical growth trends and the latest earnings, growth is fine. The selloff could be due to worries about a recession that could slow growth. However, the company remains a long-term compounder that will benefit as enterprises invest in its innovative human resource software.
Moving on to the valuation, the company is trading at a reasonable price-to-earnings multiple. The company earned $6.14 in non-GAAP net income per share in 2022. The consensus estimate for 2023 is $7.67, implying a 34x forward P/E. That’s a bargain for a company expected to grow revenues by 20% in 2024.
Nutanix (NTNX)
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The San Jose, California-based Nutanix (NASDAQ:NTNX) provides an enterprise cloud platform that enables customers to move workloads between on-premises and public clouds.
In August, it announced a partnership with Cisco Systems (NASDAQ:CSCO) to accelerate hybrid multi-cloud deployments. Therefore, the company will offer hyperconverged solutions for business transformation and IT modernization.
According to Bank of America, Nutanix can leverage Cisco’s global scale and go-to-market reach to gain more customers. Analysts at the firm upgraded NTNX stock to “buy” and increased the price target from $39 to $50. The target presents over 40% upside as of this writing.
Beyond the deal, the stock has other beneficial tailwinds, such as the launch of GPT-in-a-Box. This AI solution will assist organizations in adopting generative AI and AI/ML applications while ensuring the security and privacy of their data.
The GPT-in-a-Box solution and the Cisco partnership will drive future growth. On September 14, it announced that Micron (NASDAQ:MU) had selected Nutanix to provide a cloud platform for Micron’s manufacturing facilities worldwide. This win highlights the performance, total cost of ownership, and scalability benefits that Nutanix’s platform delivers.
Clearly, it’s evident that Nutanix is primed to win cloud platform deals from other Fortune 500 companies. It’s one of the cloud computing stocks to watch for growth.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.
