Cloud computing has become one of the hottest markets for tech stocks, as many companies have moved their focus from hardware-based products to cloud-based services. This shift in the industry has not only created a lot of new, fast-growing companies that focus solely on cloud services, but it has also helped reinvigorate older tech companies.
Of course, not all cloud companies are experiencing the same growth, and finding the right ones for your stock portfolio with great long-term potential can be an overwhelming task. That's why a few Motley Fool contributors have compiled this list of top cloud computing stocks for you to buy right now. Read on to find out why Twilio (NYSE:TWLO), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN) made the cut.
Twilio: Making communications easy
Brian Withers (Twilio): Twilio might not be a household name, but you've probably experienced its software and not even realized it. You might have received a phone call from your Lyft driver, an SMS text from Airbnb providing updates on your booking status, or a phone call to confirm your concert tickets are still available to sell on StubHub's marketplace. All of these events were powered by Twilio's cloud platform that helps companies integrate communications capabilities into their existing applications.
Founder and CEO Jeff Lawson said that before Twilio, the process to build software-driven messaging capabilities was fragile, slow, and expensive. Companies would have to connect to a network provider, set up a communications data center, adapt existing applications by writing custom code, and likely hire high-priced consultants to integrate it all together. Once it was built, the maintenance and scaling headaches were just the beginning for this complex setup. Twilio has simplified all of this. Software developers can access its powerful communications Super Network of 25 cloud data centers in nine different regions with simple application programming interfaces that can be embedded into an organization's existing software applications.
Twilio makes most of its money (75%) by taking a tiny cut of every text, email, phone call, and video message on its network. The remaining 25% of revenue is driven by large customers who contract to pay subscription fees for unlimited usage of Twilio's products. This usage-based model powered a 51% compound annual growth rate over the last three fiscal years (not including the SendGrid acquisition) and has continued to drive strong growth of 57% and 46% for Q1 and Q2 of this year. Twilio also sports enviable net dollar retention rates equal to or exceeding 125% for the last nine quarters.
But the company's growth is just getting started. With businesses scrambling to deal with the impacts of social distancing, many have accelerated their digital transformation plans. Whether it's a call center associate now working from home, a bank teller interacting with a customer remotely, or a contactless delivery status update, these communication use cases play to Twilio's strengths. What's even more exciting for investors is that these types of customer communications have become must-have capabilities for the brands we use every day.
Although the coronavirus pandemic has been a tailwind for accelerated digital transformation efforts, it's also been a headwind for its travel, transportation, and hospitality customers. As a result of the ongoing uncertainty, management is only projecting its outlook into the next quarter. With third quarter guidance of slightly slower revenue growth of 36% to 38% and a bottom-line loss (after posting a small non-GAAP profit this quarter), the stock took a small step back after the earnings announcement.
Even though its price-to-sales ratio is a lofty 28, the solid long-term prospects for this cloud computing stock make it a compelling buy.
Cloud computing and much, much more
Danny Vena (Microsoft): There's little doubt that Amazon is the undisputed leader in the realm of cloud computing, but biggest doesn't always mean best. For example, many traditional retailers that compete with Amazon are reluctant to line the digital pockets of their biggest rival. For many of them, Microsoft's Azure is a better cloud computing choice.
That's not all. For companies that are longtime users of Office, Microsoft 365, or Dynamics 365 that are already locked into Microsoft's ecosystem, it only makes sense to aggregate many of their services with the same provider.
Microsoft only entered the race for cloud dominance in the past several years, and has bypassed many of the would-be contenders, now trailing just Amazon Web Services (AWS), according to research company Gartner (NYSE: IT) and its much vaunted Magic Quadrant.
Azure has a consistent track record of growing faster than AWS in recent years, and that continued in the quarter ended June 30, 2020. Azure grew 47% year over year during the quarter, while AWS grew 29%. Microsoft noted in its most recent quarterly report that its commercial cloud surpassed $50 billion in revenue for the first time during the trailing-12-month period. For context, AWS reported $40 billion in net sales. Since neither company provides a detailed accounting of what's included in each segment, this isn't an apples-to-apples comparison, but it does show that Microsoft continues to gain ground on its larger rival.
The platform's faster growth isn't the only reason to buy Microsoft stock now. The company has proven to be particularly resistant to the challenges facing many businesses during the pandemic. The company's more personal computing segment, which was expected to be most vulnerable, turned in a stellar performance, getting a boost from gaming via its Surface line of notebooks and tablets and Xbox content and service, which grew an impressive 28% and 65%, respectively.
The productivity and business processes segment also turned in a better-than-expected performance, the result of higher demand due to remote work.
Given the uncertainty wrought by the pandemic and Microsoft's strength across its operating segments, there's never been a better time to add the tech giant's stock to your portfolio.
Amazon's leading position
Chris Neiger (Amazon): Amazon is well-known for its e-commerce dominance, but it's the company's cloud computing segment, Amazon Web Services (AWS), that actually generates most of the company's profits. AWS offers cloud services for data storage, networking, artificial intelligence, and much more -- and it's a huge business for Amazon.
AWS's operating profit was $3.4 billion in the most recent quarter, with impressive operating margins of 31%. The segment's profit easily outpaced the $2.1 billion in operating profit from Amazon's North American e-commerce business.
And not only is AWS a key source of profit for Amazon, but it's also the undisputed leader in the cloud computing infrastructure market. AWS has 33% market share right now, compared to next-in-line Microsoft with 18%.
AWS continues to expand its sales as well, with revenue jumping 29% in the most recent quarter to $10.8 billion. The good news for Amazon is that the cloud computing infrastructure as a service (IaaS) market isn't done growing yet. IaaS will grow from an estimated $50 billion this year to $81 billion in 2022, according to the research firm Gartner.
AWS's dominance in cloud computing, combined with its profitability for Amazon, can't be overstated. As more companies look to cloud computing platforms to host their services, Amazon will surely benefit. The coronavirus has forced more businesses to expand work-from-home services and increase e-commerce sales, and AWS will benefit by being the go-to cloud service for those hosting needs.
Gartner said in a recent press release, "For the remainder of 2020, organizations that expand remote work functionality will prioritize collaboration software, mobile device management, distance learning educational solutions and security, as well as the infrastructure to scale to support increased capacity." As more companies look to the cloud to expand these services, they'll likely rely on Amazon's leading cloud infrastructure service to do so.