Cloud computing is certainly not new, but the pace of the digital transformation they are creating has accelerated. One of the unexpected consequences of the coronavirus pandemic has been the rapid increase in the adoption of cloud-based solutions. Given the ease and convenience of these applications and platforms, there's almost no chance that the world will go back to business as usual.
Faced with this changing paradigm, investors are naturally looking to capitalize on these changes in consumer and business behavior. One way to profit is by identifying companies that have a critical advantage over their rivals. It can be a company with a growing network effect, one that's an entrenched first-mover, or one with unmatched scale.
Assuming you have an emergency fund to fall back on and $3,000 (or less) that you don't need for immediate expenses, here are three cloud computing stocks that have a killer advantage that will serve them well in the months and years to come.
1. Zoom Video Communications: The choice of the multitudes
Another by-product of the pandemic has been the rapid adoption of videoconferencing, not only by businesses, but by consumers wanting to stay in touch with friends and family. Zoom Video Communications (ZM 3.63%) was there to answer the call. The cloud-based platform was easily accessible and just as easy to use, gaining acceptance among consumers as well as the business users it originally catered to and quickly becoming a verb in the process: "Let's Zoom!"
The ease and simplicity made it the first choice for many users. Most people loathe change, and those who have gone to the trouble of learning about video conferencing on Zoom are less likely to adopt another solution. There's also the network effect at play: The vast number of people who use Zoom makes its service all the more valuable since that's what many of people's friends and family use -- so folks aren't likely to switch.
Some investors believed that the company's growth would begin to slow as the year wore on, but that simply hasn't been the case. Zoom reported second-quarter revenue that grew 355% year over year, accelerating from 169% growth in the first quarter. The number of customers with more than 10 employees soared 458%, up from 354% growth sequentially. The number of enterprise customers generating trailing-12-month revenue of $100,000 or more jumped by 112%, also accelerating from a 90% increase in the first quarter.
Given the company's solid and growing network effect, there's every likelihood that Zoom's software-as-a-service business will continue to prosper.
2. NVIDIA: Powering the world's largest data centers
While you might not immediately consider NVIDIA (NVDA -0.01%) a cloud computing stock, consider this: The company is the leading provider of graphics processing units (GPUs) to the world's leading cloud computing operators.
NVIDIA's customer base is a who's who among cloud computing, including Amazon's AWS, Alphabet's Google Cloud, International Business Machines' IBM Cloud, Microsoft's Azure Cloud, and Alibaba Cloud -- to name just a few.
Then there's the matter of how much of NVIDIA's revenue comes from cloud computing. The company's data center segment, which includes processors used in cloud computing and data centers, grew 138% year over year during the first nine months of 2020, and now accounts for 41% of NVIDIA's total revenue. During the second quarter, data center revenue surpassed gaming for the first time, but given the accelerating adoption of cloud computing, it won't be long before it's consistently NVIDIA's biggest breadwinner.
NVIDIA was the first company to adapt its processors to the special needs of cloud computing. Parallel processing -- the ability to handle a vast number of complex mathematical calculations simultaneously, works equally well at artificial intelligence (AI) as it does at rendering images in gaming. Every cloud operator now has AI at the core of its offerings, cementing NVIDIA's advantage. This entrenched, first-mover advantage has given the company the pole position in the race to be the world's biggest cloud provider. Given NVIDIA's relentless pace of innovation, and its glowing reputation in the space, the company will be next to impossible to dislodge.
3. Amazon: The original and still leader
While its namesake e-commerce platform is the face of the business, it's hard to have a conversation about cloud computing without including Amazon (AMZN 0.64%). The company was among the first to offer computing power on an as-needed basis via the cloud. From those humble beginnings, Amazon Web Services (AWS) has emerged as the undisputed leader in infrastructure services, with scale that's unmatched by competitors.
AWS is a business that has been critically important to Amazon's success. Cloud computing accounted for just 13% of the company's revenue so far this year, but generated 71% of its profits. The reason? AWS produced juicy 31% operating margins for Amazon.
This steady stream of profits has helped the company expand other areas of its business. It has funded Amazon's continued move into international markets, considering its bottom-line results overseas are still near breakeven.
Not only that, but AWS is still growing at a remarkable pace, particularly given the size of the business. Thus far in 2020, cloud computing revenue has increased by 30% year over year, while operating income has jumped an impressive 51%.
Cloud adoption will only gain steam from here. Given Amazon's massive scale, AWS will become more profitable with each passing year.