Cloud stocks benefited during the pandemic as COVID-19 restrictions led to a greater need for cloud-based services. However, this also sent the price of many cloud stocks into the stratosphere as revenue growth surged across the industry.
Nonetheless, not all cloud stocks trade at outlandish valuations, and investors looking for reasonably priced cloud companies should consider Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and Fastly (NYSE:FSLY). Let’s find out a bit more about these three top cloud computing stocks and see if they are good buys right now.
Google parent Alphabet is best known for its search engine, YouTube, and the Android operating system. Since many of these applications require a significant data center presence worldwide, the company has emerged as a natural cloud play. Thus, it can combine the storage, developer tools, security tools, and other functions of cloud infrastructure providers with its applications, global network, and big data capabilities to foster a competitive advantage. According to ParkMyCloud, the company claims 7% of the world’s cloud infrastructure spend, lagging only Amazon’s AWS and Microsoft‘s Azure in market share.
Moreover, during the first six months of fiscal 2021, Google Cloud has contributed significantly to the growth of Alphabet’s top line. Alphabet’s overall revenue for the first two quarters of fiscal 2021 grew 47% compared with the first six months of 2020. During the same period, Google Cloud increased its revenue by 50%. This far exceeds the forecasted 19% compound annual growth rate for the industry predicted by Grand View Research.
The company did not offer an outlook for future quarters, only mentioning on its second-quarter 2021 earnings call that it would experience a “more muted tailwind to revenues” during Q3. Nonetheless, the stock has risen by nearly 80% over the last year. Despite that increase, the current 36 P/E ratio is in line with historical averages. This means that the gains could continue, even with muted tailwinds.
Amazon holds an advantage among cloud providers as it pioneered the industry when it launched AWS in 2002. Established initially to help merchants launch online stores, it eventually evolved into a shared IT platform for multiple purposes. Over time, tech companies would copy this concept, and it has spawned growth in old and new tech companies alike as IT departments work to move applications to the cloud.
Despite the innovation and competition, AWS leads the industry. According to ParkMyCloud, AWS continues to hold a 32% market share of the cloud infrastructure spend, well above the 19% held by Microsoft’s Azure.
For the first six months of fiscal 2021, net sales rose 35% to $221.6 billion. Net income surged 104% to $15.9 billion during that period as Amazon earned nearly $3 billion in income from sources such as equity investments and foreign currency transactions. Additionally, investors should note that AWS accounted for slightly over half of Amazon’s operating income despite claiming less than 13% of the company’s net sales.
Admittedly, uncertainty weighs on Amazon for now. Investors dumped the stock following Q2 earnings, in part because Q3 guidance calls for sales increases in the 10% to 16% range. Additionally, its stock has risen by only about 10% over the last year. Nonetheless, its P/E ratio of around 64 is a multi-year low, and once Amazon moves past the post-pandemic uncertainty, its multiple could begin to look inexpensive.
Investors looking for smaller cloud companies should also consider Fastly. Fastly has benefited from edge computing, a technology that brings the benefits of cloud computing closer to the end user. Its competitive advantage lies in its content development networks (CDNs). Calling itself a “platform built for all of your builders,” developers can tailor the CDN to their needs, leading to faster speeds and updates.
The appeal of these CDNs has substantially boosted its top line. In the first quarter of 2021, revenue increased by 35% from year-ago levels to $85 million. Losses surged from $51 million during that time as operating expenses rose by over 100%. Also, this slightly lagged the fiscal 2020 performance as revenue for that year climbed by 45% compared with fiscal 2019 to $291 million, while net losses increased to $96 million during that period. Rising stock-based compensation costs drove most of that increase.
Moreover, fiscal 2021 projections point to a revenue increase of 23%, which would indicate a further slowing of growth. This deceleration caused investors to sell off the stock and it has fallen by about 60% since February.
Still, this drop has created a unique buying opportunity. At a price-to-sales (P/S) ratio of just 17, Fastly is dramatically cheaper than direct competitors such as Cloudflare or DataDog, who support P/S ratios of 77 and 52, respectively. And with the stock having fallen so far despite massive growth, investors could profit as its valuation catches up with more expensive peers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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