The cloud computing market has expanded significantly over the past decade as more companies moved their businesses online. Faster internet speeds have also made it practical to process more data online and transform on-premise software into subscription-based cloud services.
But that high-growth market hasn't stopped growing yet. The global cloud computing market could still expand at a compound annual rate of 16.3% between 2021 and 2026, according to Markets and Markets, as businesses leverage more cloud-based services to streamline their operations, support growth of their mobile apps and websites, and utilize new machine learning and AI technologies to analyze their data.
It can be tough to separate the winners from the losers in this crowded market, but I believe three high-growth cloud stocks -- Alphabet (GOOG 0.81%) (GOOGL 0.69%), CrowdStrike (CRWD -1.61%), and Datadog (DDOG 0.08%) -- could still generate life-changing returns.
Alphabet's Google might initially seem like an underdog in the cloud market, but it's actually one of the sector's fastest-growing players.
Google Cloud's revenue rose 47% year-over-year to $19.2 billion, or 7% of Alphabet's top line, in 2021. Its share of the global cloud infrastructure market also rose two percentage points to 9% in the fourth quarter of the year, according to Canalys, putting it firmly in third place behind Amazon (AMZN 1.82%) Web Services (AWS) (33%) and Microsoft's (MSFT 1.28%) Azure (22%) in the public cloud race.
Google continues to attract big customers, especially retailers that don't want to tether themselves to Microsoft's other enterprise software or feed the growth of Amazon's most profitable business. Google Cloud's operating loss also narrowed from $5.6 billion in 2020 to $3.1 billion in 2021, which indicates that economies of scale are kicking in. Those losses could continue to narrow this year as it locks in more customers and raises its prices.
Alphabet still generates most of its revenue and all of its profits from its core advertising business. However, the many tentacles of that ecosystem -- which include its online search engine, YouTube, Android, Chrome, Gmail, Google Drive, and other services -- are also based in the cloud.
That sprawling ecosystem makes Alphabet one of the most diversified plays on the secular growth of the cloud market. Analysts expect it to continue to generate double-digit revenue growth with stable profits for the foreseeable future, but the stock still looks cheap at just 25 times forward earnings.
In the past, most enterprise-grade cybersecurity services required the installation of on-site appliances. That approach was expensive, required regular on-site maintenance, and was difficult to scale as an organization grew. CrowdStrike, which was founded in 2011, addresses those issues with a cloud-native platform that doesn't require any appliances.
Its platform, Falcon, protects network endpoints -- like mobile devices, laptops, desktops, and Internet of Things (IoT) devices -- from malicious attacks. It usually lures in customers with a starter trial of four cloud-based modules to cross-sell additional modules. Last quarter, 57% of its customers were using five or more modules, compared to 47% a year earlier.
Between fiscal 2020 and fiscal 2022, which ended this January, CrowdStrike's total number of subscription customers more than tripled from 5,431 to 16,325. Its revenue surged 66% to $1.45 billion in 2022, and it anticipates another 47%-49% growth in fiscal 2023. CrowdStrike's stock isn't cheap at 23 times this year's sales, but it trades at a more reasonable price-to-sales ratio compared to many other "hypergrowth" stocks.
CrowdStrike isn't profitable by generally accepted accounting principles (GAAP) yet, but it has stayed in the black on a non-GAAP basis over the past two years. It expects its non-GAAP net income to rise 56%-70% this year.
Its stock could remain volatile in this choppy market, but it's still one of the best plays on the cloud-based transformation of the cybersecurity sector.
As organizations grow, it becomes increasingly difficult for IT professionals to diagnose hardware and software platforms across a wide range of fragmented platforms. Datadog solves that problem by monitoring all those services simultaneously and aggregating the real-time data on unified dashboards.
Datadog's cloud-based service can help companies save a lot of time and money while proactively avoiding hardware and software disasters. That's why the company is growing like a weed: Its revenue jumped 70% to $1.03 billion in 2021 as its non-GAAP net income surged 133% to $167 million. It also turned profitable on a GAAP basis in the fourth quarter of the year.
Between the fourth quarters of 2019 and 2021, Datadog's total number of customers that generated more than $100,000 in annual recurring revenue (ARR) more than doubled from 858 to 2,010. Its dollar-based net retention rate has also remained above 130% for 18 consecutive quarters.
Datadog expects its revenue to grow 47% to 49% in fiscal 2022. Analysts expect its adjusted earnings per share to rise 6%.
Datadog's stock might seem pricey at 28 times this year's sales, but its robust growth rates, improving profitability, and early-mover's advantage in its high-growth niche market all justify that higher valuation.