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3 Top Cloud-Computing Stocks to Buy in 2017

By Anders Bylund - Apr 21, 2017 at 11:00AM

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Amazon, OpenText, and Red Hat can help you ride the cloud-computing IT trend to big long-term gains.

Cloud computing is already a huge, vibrant market -- and it's only getting bigger. According to a recent IDC report, worldwide spending on public cloud services should top $122 billion this year and grow to $203 billion in 2020. That's a compound annual growth rate of 21.5%, or triple the estimated growth of overall spending on information technology.

How can investors tap into this exceptional growth market? Here are three great cloud-computing options for your consideration: Amazon.com (AMZN 0.19%), Red Hat (RHT), and OpenText (OTEX 1.57%).

The AWS logo on an illustration of a desktop computer.

Image source: Amazon AWS.

The cloud leader: Amazon

This one's a report straight from Captain Obvious.

Amazon not only helped define and develop the early concepts of cloud computing, but it also remains a leader in the industry today. Amazon Web Services platform (AWS) now accounts for 9% of the company's total sales. It's also Amazon's most profitable segment thanks to roomy operating margins, topping 25% in 2016.

Oh, and AWS alone is on track for at least 11% of all global cloud-computing revenue this year. This is the silverback gorilla in the room, folks.

But the AWS operation is still young and growing. Revenue increased 70% year over year in 2015 and another 55% in 2016, as Amazon's sophisticated portfolio of cloud-based services continued to evolve. If Amazon spun out AWS as a standalone company, analysts at Trefis would expect it to have a market value of at least $120 billion.

You can bet that Amazon will continue to invest in this cash-printing profit machine for years to come, leveraging this early market lead at every turn. It's true that an investment in Amazon won't be a pure play on cloud computing, because you'll also have to buy in to the company's large presence in online retailing. That's another industry-defining disruptor, so no problem there.

A line of red fedoras, hanging on wall hooks.

Image source: Red Hat.

The inveterate systems designer: Red Hat

Like Amazon, Red Hat isn't chiefly known as a cloud-computing specialist. Also like Amazon, that's changing in a hurry.

The vendor of Red Hat Linux and related open-source software tools has made sure to make its products available on every cloud platform that matters. Red Hat has even taken the next logical step by becoming a preferred vendor of cloud-computing development platform OpenStack, which in turn has emerged as a favorite solution for quick, secure, and easily manageable cloud development.

Red Hat didn't invent OpenStack but has shouldered a large part of the responsibility for keeping this multi-layered software package up to par.

CEO Jim Whitehurst sees it as an important growth driver going forward. The direct revenue impact from OpenStack is not significant today but is growing very fast and establishing Red Hat as a leader in the field.

"These are things that take a while. There's a real S-curve and we're still in the growing part of the S-curve," Whitehurst said in Red Hat's latest earnings call. "Importantly, we believe that Red Hat OSP [OpenStack platform] is increasingly being recognized as the gold standard for large-scale production OpenStack deployments."

So Red Hat is looking forward to great OpenStack growth over the next couple of years, which should serve as the foundation of an even bigger long-term growth story. In the meantime, Red Hat Enterprise Linux already powers a lot of the cloud-computing resources you see online today.

OpenText CEO Mark Barrenechea.

OpenText CEO Mark Barrenechea. Image source: OpenText.

The data-management specialist: OpenText

Finally, OpenText attacks the cloud-computing opportunity from a completely different angle. Amazon and Red Hat supply the broader platforms on which cloud-computing tools can run, while OpenText explicitly builds those customer-facing tools. Back-end versus front-end, if you will.

Granted, OpenText's target demographic isn't exactly Joe Consumer. Instead, the company builds advanced data-management tools to help large corporations keep their information organized. Other OpenText products can run on top of those data collections to analyze data patterns and tease out actionable information. Cloud-based systems have become an increasingly important part of the company's operations in recent years, a fact that's often presented as a major selling point.

Some of OpenText's cloud products are sold as self-hosted packages, to be installed on the client's own systems or AWS-style platforms. Others are pre-packaged solutions with full-featured OpenText support and management services. Cloud sales now account for 33% of the company's total revenues, up from 11% three years ago.

Cloud computing has helped OpenText kick new life into a stalling revenue growth engine, and that story should continue for many years. 

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Stocks Mentioned

Red Hat, Inc. Stock Quote
Red Hat, Inc.
RHT
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,146.38 (0.19%) $4.13
Open Text Corporation Stock Quote
Open Text Corporation
OTEX
$38.26 (1.57%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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