The angst on Wall Street is reaching a fever pitch as investors fret over the U.S. Federal Reserve's interest rate policy, and whether or not its resolve to raise rates will lead to a "hard landing" (aka a recession). This worry spilled over into the corporate world, and many businesses are tightening their spending budgets.
But one area of the economy seems to be doing just fine: cloud computing. Sure, new tech projects aren't cheap, so some businesses are tapping the brakes a bit. However, cloud computing is a long-term money saver, so many cloud computing companies continue to report strong revenue growth.
With the market in turmoil, now looks like the time to put money to work if you plan to be invested in the cloud for the next decade. Give Amazon (AMZN 2.75%), Salesforce (CRM 1.16%), and Nvidia (NVDA 3.55%) some serious attention in October. Let's find out a bit more about these three cloud stocks.
1. Amazon: The public cloud pioneer is still doing incredible work
When times are tough, it can pay to play it simple. This list of top cloud stocks deserves to start with Amazon, which helped get the public cloud computing party started.
Amazon's e-commerce business faces some serious headwinds right now along with the rest of the industry. As pandemic restrictions ease, households are headed back to stores. Amazon's "product sales" segment has done the unthinkable and shrunk so far in 2022. Revenue fell 1.7% year over year to $113 billion through the first half of the year.
But that's OK because longtime Amazon shareholders know that the cloud segment, Amazon Web Services, is the company's real moneymaker. It's a highly profitable business, with AWS alone hauling in $12.2 billion in operating profit in the first half of 2022 (an operating margin of 32%). Since Amazon's product sales department is reporting losses this year, AWS is basically floating the company's current rate of heavy investment to promote future expansion.
AWS is a solid foundation to build on. Think of the public cloud giant as a general-purpose IT toolbox with lots of potential for growth. After all, even in today's tumultuous economy, AWS sales increased 35% year over year in the first six months of 2022. The company is using its know-how in cloud computing in other areas now, too. For instance, Amazon closed its acquisition of entertainment studio MGM early in 2022, which strengthens its Prime Video streaming service. More recently, it announced the intent to acquire 1life Healthcare, known as One Medical, as it renews its push into tech-enhanced healthcare.
Because of its investment spending, Amazon has dipped into the red this year (both on a net income and a free cash flow basis), so valuation isn't really helpful in assessing this stock at the moment. However, Amazon has been in this position before, where it sacrifices short-term profit to tee itself up for another run of growth down the road. If you believe this cloud titan's spending will pay off, shares (down nearly 40% from all-time highs) could be a real steal right now.
2. Salesforce: Cloud software is an indispensable tool for the 2020s
Speaking of aggressive business investors, cloud software provider Salesforce has often been criticized for its serial acquisitions over the years. Many of these purchases (usually of small peers it can bolt onto its own platform) are paid for in new stock, which dilutes ownership of existing shareholders. Nevertheless, in spite of this, Salesforce has delivered big returns. Free cash flow per share is up over 500% in the last decade.
Since its monster takeover of Slack in the summer of 2021, Salesforce has gone quiet on the acquisition front. Instead, it announced its first-ever share repurchase program. To many investors, this may signal the end of Salesforce's record-setting run of growth for an enterprise software provider. The outlook for the remainder of this year seems to indicate this, too. Management currently sees revenue increasing by just 17%, which would be the first time Salesforce has grown less than 20% on an annual basis.
Don't sleep on Salesforce, though. At the company's annual developer conference, co-founder and co-CEO Marc Benioff helped unveil new software capabilities and explained the company is still committed to growing. More acquisitions aren't off the table, either. After building a leading platform for unlocking the value of cloud data, I doubt Benioff and the top team are about to let their foot off the gas and allow an upstart to chip away at its customer base.
As of this writing, Salesforce stock trades for less than 26 times trailing-12-month free cash flow -- the cheapest it's been since the depths of the Great Recession in 2008 and 2009. If you're looking for a top cloud software investment on the cheap this month, look no further than Salesforce.
3. Nvidia: Building a "full-stack" computing company
That's right, Nvidia the video game semiconductor company is now also a cloud stock. I'm not just talking about its GeForce Now game streaming service either (which, by the way, has one less competitor now that Alphabet has shuttered its Stadia video game offering).
Nvidia has been packaging its GPUs (graphics processing units) and other hardware with software for years, but it's only just beginning to double down on its software chops. The last couple of years, it's been unveiling new cloud software subscription services built atop its chip designs. Its flagship product, Omniverse, is a collaborative design platform that helps developers speed up their creations and unlock the power of artificial intelligence for new applications -- from movie content to virtual assistants to simulations of real-world locations. Nvidia says this pivot is necessary as customers are in need of a "full-stack" tech development company, one that provides hardware and deeply integrated software.
Granted, video game sales have been weighing heavily on Nvidia's financial results this year. What was once the flagship segment has sunk to second place behind data centers. In fact, video game revenue was down 33% year over year in the second quarter, and a quick fix isn't likely as its brand new lineup of high-end gaming GPUs won't really get rolling until the fourth quarter of this year.
But the data center segment, along with the automotive end market (which is on track to reach $1 billion in annual revenue), has massive potential. Nvidia continues to make advances with its chip designs and building new cloud subscription revenue streams, opening up new frontiers for the tech world to advance into other industries. Shares currently trade for 47 times trailing-12-month free cash flow, but that includes an ugly second quarter, when the company cleared out excess inventory of gaming chips. It also had to pay a $1.35 billion acquisition termination fee in the first quarter after it was forced to abandon its takeover attempt of ARM.
In other words, I think financials could start to improve from here on for Nvidia. This stock looks like a top cloud computing bet this month if you plan on holding for the next few years or more.
