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3 Top Cloud Computing Stocks to Buy Right Now

By Nicholas Rossolillo - Updated Feb 4, 2021 at 12:25PM

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The cloud is still a massive secular growth trend you don't want to miss out on in the 2020s.

Faced with pandemic-fueled disruption, many organizations cut spending on information technology last year to keep their businesses afloat. However, as 2021 gets under way and the effects of COVID-19 and related economic lockdowns ease, IT spending is coming back -- and cloud computing is accounting for an increasing share of IT budgets. All indications are that another decade of torrid growth lies ahead for this increasingly important industry.

With that in mind, I think Anaplan (PLAN 0.58%), Medallia (MDLA), and (CRM 7.44%) would make timely stock purchases right now.

Anaplan: Using data in the cloud to make better plans

Of the some $3.75 trillion tech researcher Gartner (IT 4.22%) expects to be spent worldwide on IT in 2021 (a 4% rally from 2020), enterprise software could be a key area of growth. Software is an intangible asset, and is easy to switch off when an organization is trying to control how much cash is leaving its coffers. But as projects get fired back up again in the wake of 2020, software will be just as easy to turn back on and deploy again. Gartner thinks enterprise software will outpace IT spending growth overall, with a more-than-7% increase in the year ahead. 

This is the realm that Anaplan operates in. Specifically, Anaplan offers a cloud-based and AI-enhanced enterprise resource planning (ERP) service, software that helps organizations plan for a diverse set of scenarios, from budgeting to supply and demand forecasting to marketing performance analysis. Anaplan has some key advantages over its legacy software peers, though. It's cloud-native, so a general migration to cloud computing makes Anaplan an ideal fit with modern tech infrastructure. It was also built to be collaborative, a basic staple given that many workforces are working remotely rather than together within an office. And because machine learning is built into its service, planning teams can gain extra insight into potential outcomes and plan further for contingencies. 

The superiority of Anaplan's software shows up in the numbers. Like other enterprise software outfits, revenue took a hit last year as customers tapped the brakes on new spending. Nevertheless, a "bad year" for Anaplan still equated to sales growth of 30% through the first nine months of the company's 2021 fiscal year (the period ending Oct. 31, 2020). As Anaplan begins lapping the initial effects of the pandemic from last spring, I think there's a good chance the company's revenue will accelerate. 

Granted, there are reasons an investor might pause before investing in Anaplan. Free cash flow was negative $27.8 million through the first nine months of the year, and it's unlikely to swing into positive territory anytime soon as the company is spending heavily to maximize growth right now. Nevertheless, Anaplan had ample cash of $297 million on balance at the end of last October. Trading for 23 times trailing 12-month sales, shares look like a long-term value given Anaplan's current growth and long-term potential in an ERP space worth tens of billions of dollars a year in annual spending.

Two people pictured offscreen working on several laptop computers.

Image source: Getty Images.

Medallia: The rise of digital experience monitoring

Speaking of companies with AI built into their platforms, Medallia looks like a solid pick in the digital experience market. Medallia is a customer and employee experience service that captures digital signals to measure an experience within an application, or some other digital interaction. Medallia's AI then analyzes and predicts a user's interaction and provides actionable steps for a company to improve. 

This is the same sandbox that Qualtrics XM plays in, a company that recently re-debuted as a public concern after SAP spun it off via IPO. SAP acquired Qualtrics in 2019 for $8 billion, but Qualtrics is now valued at nearly $25 billion, some 30 times trailing 12-month sales. By contrast, Medallia is valued at a market cap of $6.2 billion, under 13 times trailing 12-month sales.

Medallia trades for a relative value for a reason. Revenue increased "only" 20% through three quarters of the company's 2021 fiscal year, impacted by similar enterprise software spending trends as Anaplan. Medallia also isn't profitable yet, operating at a negative free cash flow of $26.0 million over the same nine-month stretch. But with $654 million in cash and short-term equivalents offset with convertible debt of $442 million at the end of last October, Medallia is in good shape. 

As organizations revamp their digital budgets this year, Medallia's software growth could pick up once again as well. And at less than 13 times trailing 12-month sales, I think this stock is a real value. Digital experience software is a powerful tool helping companies reduce the number of customers and employees that leave. That kind of continuous improvement to applications -- new territory for many companies adapting to fast-changing times -- is invaluable. In a new cloud-based era, I think Medallia is just getting started. 

Salesforce: An emerging cloud platform leader

Anaplan and Medallia's stories are all about growth and reaching profitable scale, but cloud pioneer Salesforce already reached that point in its journey years ago. These days, Salesforce has been busy transforming itself from a niche software service (sales and service relationship management) into a full-blown enterprise software platform. The company is quickly turning into a central part of many organizations' digital toolkit, and it's achieving that by acquiring smaller peers and plugging them into its ecosystem. This is putting Salesforce on a collision course with Microsoft and other cloud computing giants.

Its latest takeover, the pending acquisition of collaboration specialist Slack, is its biggest yet. The move is aimed toward the future of work, which Salesforce thinks will favor remote employees working with each other from afar via the internet. Salesforce stock is down about 20% from all-time highs, reflecting the risk Salesforce's spending spree doesn't pay off. I'm buying the pullback, though.

There are two reasons. First, the company has a long history of making acquisitions and turning them into highly profitable members of the Salesforce family (or Ohana, as Salesforce calls it). I don't see fast-growing Slack working out any differently. And second, Salesforce could also benefit from a rebound in IT spending in 2021. After all, while the company remained in double-digit percentage growth mode last year, it wasn't a pain-free period. Many of its customers suffered during the pandemic, and a gradual loosening of corporate budgets is bound to turn into higher cloud platform activity like what Salesforce offers. 

This is a premium-priced stock at nearly 60 times trailing 12-month free cash flow. But Salesforce is on a mission to become one of the largest software companies in the world, and its success up to this point makes me optimistic it will achieve its ambitious goals. Largely responsible for getting the cloud revolution started in the first place, this remains a core part of my portfolio, and is worth another buy after the pullback post-Slack acquisition announcement.

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Stocks Mentioned

Salesforce, Inc. Stock Quote
Salesforce, Inc.
$185.92 (7.44%) $12.87
Microsoft Corporation Stock Quote
Microsoft Corporation
$267.70 (3.42%) $8.84
SAP Stock Quote
$98.41 (4.42%) $4.17
Gartner, Inc. Stock Quote
Gartner, Inc.
$251.29 (4.22%) $10.18
Anaplan Stock Quote
$63.73 (0.58%) $0.37
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
Medallia, Inc. Stock Quote
Medallia, Inc.
Qualtrics International Inc. Stock Quote
Qualtrics International Inc.
$14.64 (9.99%) $1.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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