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3 Cloud-Computing Stocks That Are Better Buys Than Snowflake

By Keith Noonan, Joe Tenebruso, and Will Healy – Updated Oct 27, 2020 at 8:41AM

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Snowflake stock is hot, but these companies could be even better for your portfolio.

The world's computing needs will increasingly be handled through the cloud, and Snowflake's (SNOW -3.20%) leading position in data-warehousing services has made its stock one of 2020's biggest market success stories. The company's stock skyrocketed following its initial public offering in September, and its share price is now up roughly 140% from its IPO price of $120 per share. 

As impressive as Snowflake's market debut has been, there are likely even better stocks in the cloud-computing space. Read on to see why three Motley Fool contributors identified Fastly (FSLY -3.89%), Microsoft (MSFT -0.61%), and Alphabet (GOOG -1.66%) (GOOGL -1.79%) as superior investment opportunities. 

A cube with illuminated cloud icons on each side.

Image source: Getty Images.

Facilitating the cloud-communications revolution

Keith Noonan (Fastly): Snowflake's stock performance has been undeniably eye-catching this year, but edge-computing specialist Fastly has it beat with its share price nearly quadrupling across 2020's trading. Edge computing shifts cloud-computing processes from central servers to data centers that are closer to users' physical locations, speeding up content delivery and reducing strain on networks. These services have become increasingly essential as coronavirus-related conditions have pushed more communications to the cloud, and Fastly has enjoyed surging demand. 

However, the company's stock also trades off more than 40% from the lifetime high that it hit earlier this month. The substantial sell-off came after the company published preliminary third-quarter results that arrived with sales that came in significantly below the market's target.

While management's previous guidance called for sales between $73.5 million and $75.5 million, Fastly is now anticipating revenue between $70 million and $71 million for the quarter due to reduced demand from large customers, including ByteDance's TikTok. The edge-computing company has a market capitalization of roughly $9 billion and is valued at about 30.5 times this year's expected sales after the pullback. The company's shares are looking attractive again.

The business is growing at a rapid clip despite the preliminary third-quarter results underwhelming investors, with the midpoint of projected sales for the quarter still indicating growth of roughly 42% year over year. The company still has huge room for growth as it brings new customers onboard its platform and boosts spending per customer by providing expanded services. Demand tailwinds could make Fastly stock a big winner over the long term.

The cloud titan

Joe Tenebruso (Microsoft): Not all cloud stocks are priced at astronomical levels. In fact, one of the best cloud-computing companies -- Microsoft -- is currently trading for about 10 times its projected sales for the year ahead and 33 times forward-earnings estimates. Although that may not exactly be traditional value territory, it's certainly a better bargain than the 145 times forecasted sales that Snowflake is currently trading for. 

Microsoft is also a much more diversified and, by extension, lower-risk business than Snowflake. Microsoft's cloud-based Office productivity software suite powers countless businesses' processes. Its Azure cloud-infrastructure platform is the foundation upon which many companies' cloud operations are built. Its venerable Windows operating system, leading Xbox gaming console, and popular Surface devices give Microsoft -- and its shareholders -- even more ways to profit. Snowflake, in contrast, is mostly focused on cloud-based data storage and analytics.

Moreover, Microsoft is also incredibly profitable, while Snowflake has yet to obtain sustained profitability. With annual revenue of $143 billion and operating profits of $53 billion, Microsoft is clearly the more financially powerful business (Snowflake generated only $403 million in revenue and $349 million in operating losses over the past year). 

Snowflake, of course, is a much smaller company than Microsoft and thus has a larger opportunity for growth. But I'd argue investors are paying too high a price for Snowflake's expansion potential. Microsoft is the far better deal -- and the far better business.

Cloud profits are a search away

Will Healy (Alphabet): Most end users think of the Google parent as a company for search, YouTube, or Android. However, many of its applications needed a cloud environment internally to operate, which later set the stage for a Google cloud service.

Google Cloud provides infrastructure services, data analytics, and machine learning in a secure environment. Also, it powers the newly rebranded Google Workspace, posing yet another cloud-related challenge to Microsoft.

Such moves help to improve Alphabet's cloud-market share. It is the fourth-largest player in the cloud, lagging only Amazon (NASDAQ: AMZN), Microsoft, and Alibaba (NYSE: BABA). In 2019, the company grew to a 5.3% market share in the public cloud, according to Gartner.

In the first six months of 2020, Google Cloud brought in just under $5.8 billion in revenue, a 47% increase from 2019. This is only about 7% of the company's overall revenue. Still, Google Cloud's revenue share grew as overall revenue fell for the search giant.

Alphabet also holds an advantage over Snowflake as it is significantly less expensive and earns a profit. Alphabet trades at about 6.5 times sales, well under Snowflake's price-to-sales (P/S) ratio of just under 135! Moreover, if estimates prove accurate, Alphabet's predicted 10% drop in earnings for the year will give way to an increase of almost 28% in 2021. Snowflake is probably years from positive earnings.

For investors wanting a secure, profitable company increasingly focused on the cloud, the answer could be as simple as a Google search.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Joe Tenebruso has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Fastly, Microsoft, and Snowflake Inc and recommends the following options: short January 2021 $115 calls on Microsoft and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

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