Enterprise Cloud Stocks To Precipitate Returns
Zacks Investment Research | Sep 26, 2019 04:14AM ET
Enterprise cloud technology is making the world of business a more efficient and effective environment. The primary reasons that businesses are adopting to the cloud include cost-cutting measures, and new features & capabilities that would otherwise not have been attainable, according to Datometry.
IT is the business segment that will be effected the most by cloud computing with Gartner anticipating that 28% of IT spending will shift to the cloud by 2022 or $1.3 trillion in annual spend. This is an enormous opportunity for cloud players that are positioned to take on this demand.
On average organizations use roughly 5 different cloud platforms, according to hostingtribunal.com. This leaves room for the expansion of a plethora of cloud players as long as their product offering is meeting customer needs.
Below are some established enterprise cloud stocks that have both turned a profit and marked their territory in the cloud market.
ServiceNow ( (NYSE:NOW) ) – Mkt Cap: $50B YTD: 41% P/S: 11.5x
ServiceNow started as an IT workflow cloud to improve IT service management. Today the Now Platform® is a single cloud platform that encompasses IT, employee, and customer workflows.
According to NOW’s most recent annual report, its cloud platform supports “workflow automation, electronic service catalogs and portals, configuration management systems, data benchmarking, performance analytics, mobile experience, encryption and collaboration and development tools.”
Since NOW’s IPO back in 2012, the company has demonstrated consistent quarter-over-quarter topline growth and year-over-year growth that hasn’t faltered below 30%. The company is profitable but has been toeing the line for the last year and a half. None the less, it has proven it can turn a profit even with its remarkable growth rate.
NOW’s share price has boomed over the past few years and its valuation has risen with it. The stock is currently sitting at a forward P/S of 11.5x, which is on the higher side of the shares 5-year trend (ranged from 5x to 14x). ServiceNow’s recent profitability and continued robust growth has given investors’ increasing confidence in this stock moving forward.
I love ServiceNow’s product offering and managements ability to execute, but its current valuation makes me hesitant to jump into this stock. I may wait for a dip before I consider buying NOW.
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Equinix ( (NASDAQ:EQIX) ) – Mkt: $46B YTD: 64.7% P/E: 25.9x
Equinix is set up as a data center real estate investment trust (REIT) and is the world’s largest international business exchange (IBX). This firm benefits from both the tax implications of a REIT and the exponential growth potential of the digital age.
By 2021 at least 50% of the world’s GDP will be digital, according to IDC. Being interconnect in this increasingly digitalizing global economy is only going to become more vital. This creates an enormous amount of opportunity for the worlds largest IBX company.
According Equinix’s most recent annual report, “more than 9,800 companies, including a diversified mix of cloud and IT service providers, content providers, enterprises, financial companies, and network and mobile service providers, currently operate within Equinix IBX data centers.”
Equinix’s key customers include AWS (NASDAQ:AMZN) , Google Cloud (NASDAQ:GOOGL) , Microsoft Cloud (NASDAQ:MSFT) , Oracle Cloud (NYSE:ORCL) , and pretty much every major cloud player you could think of. The firm also services a significant number of other fortune 500 companies.
Equinix’s reoccurring revenue model drives quarter-over-quarter growth and a compounded annual growth rate (CAGR) of 20% over the past 4 years. This company has had a great track record and continues to produce a robust bottom-line with expanding margins.
EQIX is trading at a P/E valuation of 26x, which is on the lower side of this stock’s 5-year trend, having traded as high as 40x and as low as 17x. EQIX is yielding shareholders a comfy 1.7% dividend, something that most of its tech counterparts can’t boast of.
This stock has rallied roughly 65% so far this year, riding its all-time highs. Lower interest rates and economic expansion, with technology being the primary driver, makes a tech heavy REIT like EQIX appear increasingly attractive.
Take Away
The enterprise cloud space is expanding fast, and these established players are well positioned to ride this wave all the way to the shore. It won’t be long before people stop asking if a firm is using cloud technology and start asking which clouds a firm is leveraging.
The usefulness of public cloud technology has been proven. Leveraging core capabilities and outsourcing the rest is the going to cut costs for businesses and give them access to capabilities they would otherwise not have had.
The stocks that I discussed are going to benefit from the increasingly digitalized world and would make great long-term plays for your portfolio.
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