Cloud computing is red-hot right now but it's one of those overnight successes that were years in the making. Decades, even. The idea of running intense computing processes in a data center and presenting the results in a web browser or mobile apps over the internet started to make sense way back in the dot-com boom, and the coronavirus health crisis simply accelerated the cloud computing industry's snowballing growth trajectory.
Some cloud computing stocks are taking off very quickly, and you're not likely to see them at their current prices again for years to come. Others were lost in the shuffle as investors, analysts, and journalists focused on the most obvious superstars of the industry, and these stocks are simply undervalued right now.
Let's take a look at a mix of skyrocketing winners and undervalued dark horses in the cloud computing sector. These three stocks are solid buys today.
Image source: Getty Images.
1. Anaplan
Business-planning software maker Anaplan (PLAN +0.00%) crashed hard in the spring of 2020 but climbed back to yearly highs last week, thanks to a stellar second-quarter report. Sales rose 26% year over year to $107 million, and adjusted net losses narrowed from $0.12 to $0.04 per share. The results exceeded Wall Street's expectations across the board, and management explained that the company is poised to grow rapidly in the next few years.
CEO Frank Calderoni said on the earnings call:
A majority of our customers didn't come to Anaplan to do a single-use case. They came to Anaplan with an objective to really drive a more extensive use of our platform. And so that provides us with a good opportunity. I've said this before, I'll say it now. I do believe, with many of our customers, we're in the early stages of working with them.
In other words, Anaplan is making a ton of connections with new long-term customers right now. That should result in robust sales growth for years to come, which, in turn, drives profit growth in this high-margin corner of the technology market.
That report pushed Anaplan's stock price 30% higher in a single day. The long-term growth story is much greater than that quick bounce back from the doldrums of the spring and early summer.
2. Datadog
Things are getting a bit meta here. Datadog (DDOG +2.55%) offers cloud-based services that help other companies monitor their own cloud computing products and services. If that sounds like a great business to run in the era of coronavirus-inspired work-from-home policies, you're absolutely right. Datadog is crushing Wall Street's expectations this year, and the stock has gained 123% year to date.
This is a young stock, having entered the stock market just 50 weeks ago, but Datadog's business has been around for a full decade. The company's client list includes household names like Samsung, Whole Foods Market, Comcast, and Twitter. Maybe you thought that some of these heavyweights would have their own monitoring solutions for cloud computing data centers and services -- especially technology titan Samsung and Amazon.com subsidiary Whole Foods -- but they all rely, at least in part, on Datadog, instead.
And once Datadog sniffs its way into your monitoring setup, many customers find it hard to live without it. In the second-quarter earnings call, CEO Olivier Pomel highlighted a handful of deals with airlines, universities, a theme-park chain, and two unnamed hotel brands. As Pomel said:
These wins show that even in the face of challenging times for these customers, transforming to ensure business resilience and longevity is a top priority. Next, our platform strategy continues to resonate and win in the market. We have about 12,100 customers, which represent growth of 37% from about 8,800 last year.
And when established Datadog clients renew their contracts, they tend to add services and spend more. The company aims for a dollar-based net retention rate of 130% per quarter, which works out to a 30% increase in the average renewal's dollar value. That goal has been met in each of the company's three earnings reports as a public company.
That combination of customer loyalty and rising contract values adds up to a fantastic growth story for the long haul. If you don't invest in this puppy while it's young, that mistake could hound you for years to come.
Image source: Getty Images.
3. Limelight Networks
Content delivery network (CDN) specialist Limelight Networks (LLNW +0.00%) helps other companies deliver data to consumers around the world. The company provides storage inside high-traffic network hubs, automatically delivering your download or media stream from a nearby hub. It's perhaps the most consumer-oriented cloud computing business model I know. The company plays a part in high-volume download operations such as software updates for popular video game Fortnite, but most of its moneymaking business springs from streaming video services.
It's been quite a year in that industry, starting with Walt Disney launching Disney+ in November and followed by a steady stream of new video platforms ever since. And consumers are tuning in to these video services in droves, looking for entertainment options while stuck at home in the era of COVID-19 lockdowns.
"This is a good time for the industry and a particularly good time for us," Chief Strategy Officer Sajid Malhotra told me over the phone in July. "We have never grown sales by 10% and here we are thinking about growing 15%-plus in 2020. So our growth is accelerating, the profitability of the business is accelerating."
