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3 Top Cloud Computing Stocks to Buy Right Now

By Nicholas Rossolillo - Updated Apr 13, 2020 at 8:01AM

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Access to data for remote work is more important than ever before.

The continued spread of COVID-19 has many businesses and their employees reeling. If not facing outright closure, many businesses are having to deal with a sharp shove in the direction of digital-only operations -- a fast-growing trend that quickly went from high priority to absolute must. The world will be a changed place once the dust settles, and the mobility and cloud computing infrastructure that supports it just got cemented into place.

Companies that were already beneficiaries of the growing cloud computing movement could be in for some short-term pain along with everyone else as they deal with the lockdown to halt the spread of the pandemic. But for the long term, these stocks are timely buys right now. Three that I'm eyeing are (CRM 1.92%), Twilio (TWLO 1.62%), and Upwork (UPWK 7.30%).

The cloud pioneer still pushing its boundaries

Salesforce started out as a creator of sales and service software -- which are still high-growth segments and more important than ever before. Salesforce partner and digital consultant Avionos reports that 92% of surveyed corporate purchasers say a knowledgeable and trusted salesperson will be key to helping them navigate an economic downturn.

That underscores the important role Salesforce has taken on in recent years, as well as how it has expanded to encompass tech well beyond its original niche. More than just technology that helps businesses be more efficient, the software platform is central to many organizations' managing of customer relationships at all levels. As a result, cutting spending on such initiatives is likely to be far down the list when it comes time to tighten up corporate budgets, and that could make Salesforce a relative safe haven during the current crisis.

Besides potential growth, Salesforce also entered 2020 in tip-top shape. The company had $7.95 billion in cash, cash equivalents, and short-term investments on the balance sheet and just $2.67 billion in debt. The cloud pioneer has continued putting its assets to work and flexing its muscles, acquiring several smaller firms so far this year, including the pending purchase of digital transformation company Vlocity for $1.3 billion.

Not all investors are comfortable with this strategy, but Salesforce nevertheless has a long track record of turning its own organic growth and bolt-on acquired businesses into strong free cash flow generation (i.e. what's left after cash operating expenses and capital investments during a given period). The stock trades for 34.8 times 12-month free cash flow, a premium to be sure even after a big double-digit pullback, but not totally unreasonable given the continued potential for this cloud computing platform in the decade ahead.

A picture of a cloud surrounded by a bank of computers.

Image source: Getty Images.

Building digital communication for everyone

Another cloud company that could see continued demand for its wares is Twilio. While far smaller than Salesforce and as yet unprofitable, this provider of cloud-based software tools has grown quickly in the last decade and is largely responsible for jump-starting the communications platform-as-a-service industry.

Consumers -- both business consumers and private individuals -- have been favoring high-touch communication delivered anywhere and in any format. Traditional call centers and even informational websites can't achieve this. Organizations now need to stay in touch with customers across not just traditional voice and text but also digital chat, email, video, and secure web login. With so many people confined to home due to the pandemic, these virtual touchpoints are more crucial than ever.

Besides being in high-growth mode (organic revenue grew 47% in 2019), I think Twilio is a buy after shares have tumbled from all-time highs. The stock trades for 10.6 times trailing 12-month revenue, a high price tag but the lowest valuation pegged to the cloud platform since mid-2018. And though free cash flow ran at negative $53.2 million in the last year, Twilio had $1.85 billion in cash and short-term investments on the books at the end of 2019.

The company is now turning its attention to its Flex platform, the culmination of a decade's worth of learning applied to an easy-to-use and instantly customizable contact center service for businesses looking to evolve for the digital age. Shares will take investors on a volatile ride, but this small tech outfit has a lot going for it right now.

Working from home just got a boost

We'll end this conversation with an even smaller and more niche cloud play: Upwork, the leading platform for connecting employers with freelance talent. Besides employing machine learning to help pair up the right task with the right professional, Upwork also provides communication and collaboration tools for its customers, as well as invoicing and payment services.

The small-cap stock has gotten even smaller in recent months, tumbling from well over $20 a share shortly after its IPO in late 2018 to just over $7 a share as of this writing. That puts the company's market cap at just $826 million -- a mere 2.6 times 2019 revenue. There are good reasons for this: The top line has been decelerating, as growth was forecast to be 13% to 15% in 2020, and that was before the coronavirus started to shut down wide swaths of the economy. With organizations halting hiring and employees getting furloughed, Upwork could be in for some lean times.

However, break-even was in sight (free cash flow was only negative $15.6 million last year), and the books showed $134 million in liquidity and just $18.3 million in debt at year-end. Upwork is well-funded to survive a recession and continue to invest in its growth. In fact, the global gig economy -- a workforce that favors flexible employment terms and freelance work -- has been forecasted by some researchers to nearly double in the next few years. While much of that growth could come from the ridesharing industry, it's nevertheless a positive trend that could favor Upwork.

For this small-cap stock, my typical caution applies here: Buy in small batches over time while building out a larger position. Even after their precipitous fall, shares of Upwork should remain highly volatile. But over the long term, the potential for this cloud platform looks too great, and its shares too cheap, to be ignored.

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Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
$168.20 (1.92%) $3.16
Twilio Inc. Stock Quote
Twilio Inc.
$85.17 (1.62%) $1.36
Upwork Inc. Stock Quote
Upwork Inc.
$22.19 (7.30%) $1.51

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

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