7 Cloud Stocks With High Growth Rates

Genia Turanova's picture

Wednesday, December 19, 2018 - 12:00am

by Genia Turanova

I've long been an everything-happens-for-a-reason disciple. And while the stock market sometimes exaggerates or undervalues a company or a sector (providing a good reason for stock-picking), if an underlying trend exists, a company's stock price action cannot operate in isolation.

This is why it's important to know your stocks and sectors, and that's why single-company valuation should be viewed together with that of its group's. For such comparisons, having a watch list of potential holdings is quite helpful.

Ergo, I present to you a watch list I created for a group of leading cloud computing companies. As you can see below, the entire group had a strong rally earlier this year, a rally that was interrupted by the fourth-quarter market rout. With the underlying trend of corporate IT moving to the cloud and the accompanying multi-billion-dollar spending (which is forecast to reach $160 billion this year, an increase of 23.2% over 2017, according to the International Data Corporation), the selloff could be viewed as a buying opportunity, at least for the best of the group.

A Closer Look...
All the companies on this list are peers of the No. 1 cloud pick in my premium service, Fast-Track Millionaire. My watch list includes a cloud pioneer, salesforce.com (NYSE: CRM), the largest company on the list, as well as a few smaller names. Each has crafted its own niche in the burgeoning cloud industry; therefore, these are all high-growth companies worth watching for potential portfolio consideration.

Expected growth, a metric of how fast a company's profits are expected to grow in the next 3-5 years, is the fastest for NOW. This company, whose cloud-based software and services help corporate IT organizations automate and integrate various technologies, has also added services for human resources, customer relations and security, which is likely to further improve its growth prospects. Interestingly, NOW's relative performance this quarter also puts it on top of the group, only behind Workday (Nasdaq: WDAY).

Of course, a company can outperform expectations. This is what happened to Workday (Nasdaq: WDAY), which rallied 13% in a single day at the end of November, on the strength of its third-quarter earnings reported November 29. Billings jumped 48% compared to a year ago, and $90 million more than expectations, to $830 million. The company has also seen a promising trend, a word-of-mouth/network effect, where large companies share their strong experience with WDAY software and services. This bodes well for the future.

WDAY's focus is on financial operations and human resource management. This is narrower than NOW's, but also allows the company's resources to be focused on doing the job and grabbing market share.

WDAY has all the makings of a good portfolio candidate. However, I would wait for a more attractive entry point, such as a pullback, before pulling the trigger on this stock. For now, it will remain on my watch list.

Another interesting company is Veeva Systems (Nasdaq: VEEV). Smaller than both NOW and WDAY, it has also found a well-defined niche where its cloud-based services are needed -- health care companies. And while its growth is slower, it is also relatively certain -- thanks to its unique focus, supported by the ongoing strength in health care. VEEV is not a cheap stock, and I would wait for a larger pullback before considering it.

Ultimate Software (Nasdaq: ULTI) has also been strong. One of oldest in the business (its IPO was in 1998), this payroll processor and human capital management company has successfully managed to become an industry heavyweight. With target revenue of $2 billion by 2021 -- a better-than 20% annual growth from now until then -- it's the one to watch.

Also quite attractive, Guidewire Software (Nasdaq: GWRE), is a property and casualty insurance industry cloud specialist. Already profitable and expected to grow at a 20%-plus rate, GWRE looks quite interesting at current levels.

One company on our watch list stands out: Blackbaud (Nasdaq: BLKB). This maker of customer relationships management software for non-profits has also been the slowest in terms of the revenue and profit growth. Its expected 10% growth is too slow for a software company with a P/E of 29; for now, I would avoid BLKB despite the stock's 26% year-to-date decline.

Final Thoughts
Please keep in mind that the investing ideas I present here are intended to provide a good starting point for further research. As with any tool, my Fast-Track Millionaire stock screens should not be used in isolation. You need to evaluate other fundamental characteristics of every potential investment opportunity to determine if it is right for your portfolio.

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If you'd like to learn more, then I invite you to read my report right now.

Genia Turanova does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.