The cloud has emerged as one of the more transformational technologies of the current era. Internet-based servers and the software and databases they support can cut costs and increase efficiencies for entities.
Companies ranging from newly minted start-ups to established tech giants have capitalized on this technology. And while numerous players in the sector have tremendous growth potential, I view Alphabet (GOOG -0.86%) (GOOGL -0.83%), Snowflake (SNOW 0.39%), and International Business Machines (IBM 0.13%) as among the best-positioned cloud stocks to benefit investors today.
1. Alphabet
Alphabet, like Amazon and Microsoft before it, approached the cloud as a second act. All three tech giants pivoted to the cloud to either supplement or compensate for slowing growth in original business lines.
However, even though Alphabet's Google Cloud lags behind its counterparts in terms of market share, it may be better positioned to benefit shareholders.
Image source: Synergy Research Group.
For one thing, between internet search, YouTube, and the Android OS, nearly every person who interacts with a tech device has some contact with the Alphabet ecosystem.
Moreover, in its latest reported quarter, Google Cloud's revenue growth rate was the fastest among those three companies' cloud segments -- 38% year over year, compared to Microsoft Intelligent Cloud's 20% and Amazon Web Services' (AWS) 28%.
And investors can buy that growth at a cheaper price. Alphabet stock trades at 18 times earnings, which is lower than Microsoft's price-to-earnings ratio of 26 and well below Amazon's ratio of 77. Although all three companies should continue to prosper in the cloud, the Google parent offers faster cloud growth at a lower price.
2. Snowflake
While some cloud companies may attract investors with a lower valuation, other stocks could thrive on growth potential. That seems especially true with Snowflake. The data-as-a-service company allows users to store, apply, and secure their data in a central, cloud-based location. This avoids the inefficiencies and inaccuracies that can occur when companies store that data on private servers. And while the most prominent cloud companies offer data cloud products, Snowflake's data cloud functions well regardless of which company provides those cloud services.
Also, it has only begun to tap its potential. The company appears on track to earn over $1.9 billion in revenue for its fiscal 2023, which ends Jan. 31. That would be a 68% year-over-year increase, and a small fraction of what it estimates will be a $248 billion addressable market by 2026. And its net revenue retention rate of 165% in its fiscal Q3 means its average customer increased their annualized spending on the platform by 65% year over year.
This growth does not come cheap. Even after a 65% share price drop from its all-time high, Snowflake trades at a price-to-sales ratio of 24. Still, it is not too late to buy Snowflake stock as it has become an increasingly indispensable player in the cloud, a factor that could make it worth the premium.
3. IBM
Like its mega-tech counterparts, IBM is orchestrating a cloud-driven comeback. However, it may have more riding on the cloud than its peers. The $34 billion cost of its Red Hat acquisition strained its balance sheet to the point that one could argue that IBM has made an "all in" bet on the cloud.
Thankfully for its shareholders, the gamble seems to have paid off. IBM's hybrid cloud, which helps private and public clouds interact seamlessly, consistently generates double-digit percentage revenue growth. Hybrid cloud revenue increased 15% in Q3 while IBM's quarterly revenue surged 6% to $14 billion.
Moreover, it has solidified its cloud focus with more than 25 cloud-related acquisitions, as well as by spinning off its managed infrastructure business as the new public company Kyndryl.
CEO Arvind Krishna, who took over IBM after leading its cloud and cognitive software segment, spearheaded this comeback. The stock has risen 47% since Krishna took over in April 2020. And even with that growth, it sells for about 16 times trailing earnings, a level that could rise amid IBM's improvements.
Shareholders also get a bonus in the form of $6.60 per share in annual dividends. That payout yields 4.7% at the current share price, and given the company's 27-year streak of payout hikes, those dividends are unlikely to disappear. That income and cloud-driven growth potential could foster a long-awaited comeback.
