Please ensure Javascript is enabled for purposes of website accessibility

3 Top Cloud Computing Stocks to Buy in June

By Brian Withers – Jun 2, 2020 at 11:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With an explosion in cloud-based applications, investing in the enablers is a smart play.

Earlier this year, Okta (OKTA -1.95%), a cloud identity-management company, released its annual Businesses @ Work report highlighting the trends in cloud applications across its huge customer base. These companies are continuing to adopt cloud software at a rapid pace, it said, and on average, enterprises use 88 different cloud services; 10% of them use over 200. With such a huge number of cloud-based tools being used, how can an investor pick the winners? 

It turns out that focusing on three companies that help make today's cloud software possible -- Okta, MongoDB (MDB -1.75%), and Amazon.com (AMZN -3.01%) -- is a great way to play this growing trend. Let's look at what these three bring to the table, why they have tremendous long-term potential, and how tech investors should think about becoming shareholders in these exceptional cloud computing enablers.

Okta: Securing cloud applications

As the use of cloud-based software accelerated in corporate environments, information technology organizations began to lose centralized control of their network security. To make matters worse, the trend of using remote contractors to get work done further reduced the effectiveness of a company's data center firewall.

Okta's identity management platform was developed for this exact situation and is helping companies move securely into the cloud era. As a bonus, the platform provides a convenient application dashboard for employees (and other authorized users) to access the numerous cloud software tools they use every day without having to remember all of their passwords. Its workforce and customer identity-management products have been widely adopted and continue to gain popularity.

Hand holding a smartphone with the image overlay of cloud and symbols representing different software applications.

Image source: Getty Images.

In its most recent quarter, customer count grew 28% year over year to 8,400, revenue grew 46%, and cash flow from operations reached a record $39 million. One quarter certainly doesn't make a trend, but this quarter contributes to the 44% compound annual growth rate over a four-year stretch from fiscal 2018 through the estimated $770 million to $780 million in revenue for the current fiscal year. 

Okta still has plenty of growth potential, though, as it's captured less than 2% of its $55 billion addressable market.

Amazon: Hosting cloud applications

As Amazon's fulfillment business was ramping up in the early 2000s, the company needed a way to ensure developers could test new website features at scale before rolling them out to customers. An internal set of infrastructure services and developer tools was created in 2002 to meet the needs of its tech enhancement road map.

It wasn't long before senior management realized this set of services was a core strength and could be sold to external customers. In 2006, Amazon Web Services (AWS) was first released for outside customers.

Since then, this business segment has become a juggernaut in the tech space, surpassing $37 billion in trailing-12-month revenue and reaching over $10 billion in operating income over the last four quarters. As a stand-alone company, this segment would rank 87th on this year's Fortune 500 list and bump Publix Supermarkets down to 88th. AWS' most recent quarterly 33% year-over-year revenue growth shows its products and services continue to be a crucial part of the ever-growing cloud computing landscape. As a bonus, shareholders get the benefits of a market-leading e-commerce business, too.

MongoDB: Powering cloud applications

Did you know the most common databases used today are based on 50-year-old technology that was invented before the internet, cloud computing, and mobile phones? MongoDB's founders saw the opportunity to disrupt the database landscape with a superior product that's designed for today's always-on cloud-based software that you can access from anywhere.

It's become the market leader, and its products are used by 17,000 customers all over the world. The free-to-try version that allows developers to test out the product before making any financial commitments has been downloaded over 90 million times. The use of its freemium version is the primary way that it gets introduced to developers who could be potential customers.

The company's revenue growth has been epic. It's more than doubled the top line over the past two years, and annual revenue has grown sevenfold over the past four years. Management is projecting 21% annual top-line growth this year on the low end of its guidance and will continue to post a loss as it invests in growth. Investors don't mind, though: Its $422 million in annual revenue is less than 1% of the estimated $97 billion annual database spend projected for 2023. Regardless of what the stock does as a result of the company's June 4 earnings call, this database for the cloud era has plenty of growth ahead.

It could rain on the cloud investor parade

Investors should know that these exceptional operators carry a premium price tag. With tremendous stock growth over the past 17 months, valuations have risen to lofty levels.

MDB Chart

Stock prices are from Dec. 31, 2018, to June 1, 2020. MDB data by YCharts.

MongoDB's price-to-sales ratio is a pricey 29, Okta's is even higher at 37, and Amazon's P/E is in the triple digits. Recent articles on The Motley Fool point to stretched valuations and encourage a cautious approach or even waiting for a drop before buying shares of Okta, MongoDB, or Amazon. I agree that there could be rain in the forecast for these cloud stocks, but take a different approach when looking to buy market leaders like these three.

Fool co-founder David Gardner loves to invest in excellence, and as a multidecade investor, he's seen that winners keep on winning. Waiting for great companies to go on sale could be a (lowercase) fool's errand. If you are interested in these cloud stocks, I'd buy a few shares today with the idea of building out a position over the next few years. If you do, when 2030 rolls around, your future self could be happy these cloud enablers are part of your portfolio.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Withers owns shares of Amazon, MongoDB, and Okta. The Motley Fool owns shares of and recommends Amazon, MongoDB, and Okta and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.78 (-3.01%) $-3.53
Okta Stock Quote
Okta
OKTA
$54.18 (-1.95%) $-1.08
MongoDB Stock Quote
MongoDB
MDB
$194.73 (-1.75%) $-3.47

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.