The cloud computing market is a core growth engine of the tech sector. Cloud infrastructure platforms power countless websites, apps, and streaming media services, and also provide companies with extra storage and computing power. Cloud-based software services can also analyze data, help companies make decisions, and enable people to work remotely.
The global cloud computing market could still expand at a compound annual growth rate (CAGR) of 19.1% between 2021 and 2028, according to Research and Markets, so there's still plenty of room for the market's top cloud stocks to run. Let's take a look at three top names in this sector that are worth buying right now.
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1. Amazon
Amazon (AMZN -1.35%) owns AWS (Amazon Web Services), the world's largest cloud infrastructure platform, which powers hundreds of thousands of companies across 190 countries. AWS controlled 31% of the cloud infrastructure market in the second quarter of 2021, according to Canalys, followed by a 22% share for Microsoft's Azure and 8% for Alphabet's Google Cloud.
AWS is also the only leading platform that generates concrete operating profits. Microsoft doesn't disclose Azure's exact revenue or operating profits, while Google Cloud remains deeply unprofitable.
AWS' revenue rose 35% year over year to $28.3 billion, or 13% of Amazon's top line, in the first half of 2021. Its operating profit increased 30% to $8.4 billion, or 50% of Amazon's operating income.
AWS' higher-margin revenue supports the growth of Amazon's lower-margin retail businesses, and this enables it to expand its Prime ecosystem with aggressive discounts, free shipping options, and numerous other perks, which all give it a killer advantage against other retailers.
Analysts expect the continued growth of Amazon's cloud and e-commerce businesses to boost its revenue and earnings by 23% and 28%, respectively, this year. Amazon faces tough year-over-year comparisons to its accelerated growth during the pandemic, but its stock still looks reasonably valued at 50 times forward earnings and less than four times this year's sales.
2. Zendesk
Zendesk (ZEN) provides cloud-based customer relationship management (CRM) services to more than 160,000 active clients. Salesforce.com (CRM -7.28%) is still the 800-pound gorilla of the CRM market, but its platform includes a lot of enterprise features that smaller businesses don't need.
Zendesk addresses that gap by providing simpler customer support and ticketing services for smaller businesses. Zendesk's platform can also be natively integrated into Salesforce's broader ecosystem to provide additional tools for expanding businesses.
Zendesk's revenue rose 26% to $1.04 billion in fiscal 2020 and increased 27% year over year to $616 million in the first half of 2021. It ended the second quarter with a dollar-based net expansion rate of 120%, which indicates its revenue from its existing customers rose 20% year over year. For the full year, Zendesk expects its revenue to rise 28% to $1.31 billion.
Zendesk isn't profitable on a GAAP basis yet, but its non-GAAP gross margins are expanding, and its non-GAAP EPS increased 68% in 2020 and 25% year over year in the first six months of 2021. Analysts expect its non-GAAP earnings to improve by 27% for the full year.
Zendesk's stock initially seems pricey at 121 times forward earnings, but it only trades at 11 times this year's sales. That price-to-sales ratio makes it comparable to Salesforce, which is growing at a slower rate than Zendesk and trades at 10 times this year's sales.
3. Cloudflare
Cloudflare (NET -3.65%) is the world's largest CDN (content delivery network) provider in terms of total customers. Its CDN platform accelerates the delivery of images, videos, and other content for websites, while its DNS (domain name server) service connects website addresses to the correct IP addresses. It also protects its hosted websites from various cyberattacks.
Cloudflare serves up data from 250 cities across more than 100 countries. It processes an average of 25 million HTTP requests each second, and signs up thousands of new customers each day. Most people have likely encountered Cloudflare's defenses, which ask them to prove they're not bots while browsing the internet.
Cloudflare often compares its platform to a water filtration system for the internet and says its approach will enable websites to provide faster and more secure connections while reducing the need for third-party cybersecurity services.
Cloudflare's revenue increased 50% to $431 million in 2020, and it anticipates 46%-47% sales growth this year. Cloudflare remains unprofitable by both GAAP and non-GAAP measures, but its non-GAAP net losses narrowed in 2020 and the first six months of fiscal 2021. Analysts expect its non-GAAP net loss to narrow for the full year, and possibly break even on a per-share basis in fiscal 2022.
Cloudflare's stock isn't cheap at 64 times this year's sales. However, its growth should remain robust as internet penetration rates rise, people consume more online media, and new web-based cyberattacks emerge. Those secular tailwinds could justify its premium valuation.
