Please ensure Javascript is enabled for purposes of website accessibility

3 Top Cloud Computing Stocks to Buy in July

By Nicholas Rossolillo – Jul 4, 2020 at 4:20PM

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

Cloud services have cemented themselves as a permanent and essential fixture in the economy.

Over the last decade, cloud computing has been a top-performing investment theme. But it's been this current health and economic crisis that has proven just how important cloud services are. With businesses and consumers grappling with shelter-in-place orders, it's these digital systems that have played a crucial role in keeping the wheels turning. 

Thus, I think the winds filling the cloud computing industry's sails are far from abating. Global spending was expected to be a double-digit percentage growth story before coronavirus, and the pandemic is only increasing demand, making cloud stocks an annual spending opportunity now totaling in the hundreds of billions. I like cloud stocks as the 2020s get under way. Three I own already and that I'm looking to buy more of in July are (CRM 0.54%), CrowdStrike Holdings (CRWD -2.09%), and Anaplan (PLAN).  

A whole ecosystem built around customer engagement

Salesforce has gone from a specialized customer relationship management software-as-a-service to a massive ecosystem of services centered around relationships. In this digital age, human interaction can get downright impersonal. But Salesforce is doing its part to prevent that as far as business and customer relationships are concerned.

Sure, the whole business model springs from digital data. Salesforce prides itself on delivering actionable insights to organizations based on information gathered from their customers. But through dozens of acquisitions and internal development, the company's platform has become a torchbearer for digital transformation that puts customers first. 

The company has kicked its efforts into overdrive during the current lockdown. It announced a new chat and video tool embedded directly in its software, expanded its freelance advisor marketplace with Torchlite to help businesses manage the current business environment, partnered with Siemens (SIEGY 1.36%) to create touchless office entry and workforce management systems, announced a new set of tools from subsidiary MuleSoft to help healthcare providers make better use of patient data, and invested $100 million in remote-work service technologist Tanium. Salesforce has been busy the last few months helping users of its platform make a quick pivot.

But why Salesforce stock right now? After all, the company did forecast a slowdown in revenue growth for this year, with guidance for revenue implying the company will dip below a 20% year-over-year growth rate (17% is the forecast) for the first time ever. Concerning? Maybe. But the fact that this massive cloud software company still expects to maintain double-digit percentage growth at all is notable. Plus, it has a habit of under-promising and over-delivering. Either way, after the last quarterly update, there was more than enough positive in the report to keep me optimistic about Salesforce's prospects over the next decade.  

A cloud surrounded by computers, illustrating cloud services delivered via a data center.

Image source: Getty Images.

Keeping devices safe as the workforce disperses

Endpoint security is nothing new. Whenever there is a connection between a network and a device, a potential pathway that can be exploited by those with nefarious intent is opened. Traditionally, that pathway could be closed as many organizations restricted access to their systems from within an office building. With many companies migrating operations to a remote cloud over the last decade, a new form of security that also dwells in the cloud was necessary to secure endpoints accessing the network.

But then COVID-19 happened, and the workforce suddenly got dispersed to millions of homes. It's been a not-so-proverbial torpedo into the side of traditional security thinking. With so many people now accessing networks and workflows from a home internet connection and device, cloud cybersecurity has become essential. CrowdStrike, which was already benefiting from the migration before, has skyrocketed. According to a report from tech researcher IDC, CrowdStrike's cut of market share nearly doubled in the last two years while the three largest incumbents' slices of the pie shrank.  

Specifically, the company's revenue surged 85% higher in Q1 2020 to $178 million, and sees full-year revenue of $761 million to $773 million (about a 59% increase from 2019). In a very short period, this has turned into one of the largest cybersecurity pure-plays around, and it has tremendous momentum on its side as legacy vendors were still trying to adapt to changing times before.  

Even when using expected one-year forward results, this stock trades for a very expensive 22.8 times revenue. But besides torrid growth, a premium is warranted. This is a highly profitable outfit with free cash flow (revenue less cash operating and capital expenses) margin coming in at 49% during the first quarter. It's more than likely that margin will moderate later this year, but it nonetheless speaks to how powerful and lucrative a business model subscription-based cloud computing can be.

Connecting the dots to make better decisions

CrowdStrike is one of those companies getting a huge bump from the state of current world affairs. But much like Salesforce, many cloud companies are reporting an expected pause in spending among customers, albeit a temporary one. Anaplan is one of those cloud vendors forecasting some bumps ahead.

The company is a pioneer in the "Connected Planning" industry, as it tries to disrupt offerings from old software vendors like IBM (IBM 0.02%), Oracle (ORCL -0.32%), and SAP (SAP 0.18%), and also has some overlap with services offered by larger peer Workday (WDAY 0.81%). But it's a big segment of the software field, and Anaplan is attacking it with its cloud-native and artificially intelligent software that stitches together all the data an organization possesses to help drive better decision making.

After expanding 45% in 2019, its Q1 2020 got off to a much more sluggish start. Revenue increased 37% to $104 million, management pulled the plug on full-year 2020 expectations due to lack of visibility on closing of new deals, and second-quarter guidance is calling for "only" 22% year-over-year growth.  

On one hand, a slowdown is to be expected given the belt-tightening going on at the moment. But it nonetheless speaks to Anaplan's positioning that it can keep momentum going even amid crisis. I for one think corporate planning will be in higher demand than ever as effects from the pandemic begin to slowly ease. Whether it's sales, budgeting, or special project forecasting, Anaplan's ability to help teams in different departments across an organization -- and in remote locations -- work together rather than in individual silos will be an important feature post-coronavirus. Shares trade for 12.2 times one-year forward revenue -- hardly cheap, but not unreasonable given the billions of dollars spent on planning software each year.

Nicholas Rossolillo and his clients own shares of Anaplan Inc, CrowdStrike Holdings, Inc., and The Motley Fool owns shares of and recommends Anaplan Inc, CrowdStrike Holdings, Inc.,, and Workday. The Motley Fool has a disclosure policy.

Premium Investing Services

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