Cloud computing is among the most important inventions to impact the information technology (IT) industry since the dawn of the internet itself. Infrastructure providers like Amazon, Microsoft, and Alphabet are building huge data centers around the globe that enable software companies to build and deploy products without any hardware except a few laptops. This has revolutionized the software market and sparked a multi-decade transition from on-premise computing hardware to this outsourced computing process.
Analysts expect the global cloud market to hit over $1.5 trillion in annual revenue by 2030, a number that will only grow from there. Here are three top cloud stocks to buy in February to help you ride this long trend.
1. Salesforce: Dominance in sales software
Salesforce (CRM -1.59%) is a pioneer in cloud-deployed software. The Silicon Valley giant is the leading software provider for enterprise sales reps, call centers, marketing departments, and data analytics teams under its Customer 360 platform. These are huge markets with tens of millions of workers around the globe, creating a large addressable market for Salesforce to go after. By 2026, management estimates there will be a total addressable market (TAM) of $290 billion across its entire product portfolio.
Historically, the company has been able to take advantage of this huge addressable market. In its fiscal 2023, Salesforce is expecting to reach $31 billion in revenue, which would be around 10 times its revenue in 2013. By 2026, management has a goal of surpassing $50 billion in annual sales.
From a profitability standpoint, Salesforce is betting it can reach adjusted operating margins of 25% in fiscal 2026, which feels very doable considering its gross margins are close to 80%. With the stock down almost 30% in the past 12 months, investors can currently buy this long-term grower at a discounted price.
2. Zoom Video: Not just a beneficiary of the pandemic
We all found out about Zoom Video Communications (ZM 1.46%) in 2020. The cloud-based video conferencing platform exploded in usage during the pandemic, causing its stock to soar over 500% within a year. But with the pandemic subsiding, Zoom has fallen out of favor with investors, sending its shares slumping 87% from all-time highs.
This is in contrast with Zoom's underlying business, which continues to chug along and grow. A dichotomy between the stock and business performance can provide a great buying opportunity for prospective shareholders.
Last quarter, Zoom's revenue grew 7% year over year in constant currency to $1.1 billion. This was driven by the company's strong presence among enterprises, with this segment growing 20% year over year to $614 million in revenue. It now makes up the majority of Zoom's revenue base, which is a lot higher quality than the individual customers who bought subscriptions during 2020 and early 2021.
ZM Free Cash Flow data by YCharts.
Over the last 12 months, Zoom has generated around $1.2 billion in free cash flow. This is actually down from its peak, but I don't think investors should have any gripes with this result as the business was clearly in a goldilocks situation during the COVID-19 pandemic. In light of the company's consistent growth, now looks like a great time to buy shares of Zoom -- and especially with the stock price down in the dumps.
3. Cloudflare: Website security and infrastructure tools
My last cloud stock has embraced the industry so much that it even used it in its company name: Cloudflare (NET -1.47%). You may not have heard of this company, but it is slowly becoming one of the backbones of the internet with its website security, performance, and developer tools. It has built a distributed network of data centers around the globe positioned close to internet users to allow its customers to build blazing-fast and secure websites.
Companies will pay big bucks for Cloudflare's services, which have enabled it to put up impressive growth numbers over the last five or so years. Since 2016, its revenue has compounded at 50% annually, going from $84.8 million in 2016 to $894.1 million over the last 12 months. With an estimated addressable market of over $100 billion, Cloudflare has plenty of room to grow as it wins more contracts from enterprise customers around the world, all of whom want their cloud software programs to run quickly with strong security features.
The stock is expensive, however. With a market cap of $17 billion, Cloudflare shares trade at a trailing price-to-sales ratio of 19, which is well above the S&P 500 average of 2.4. This creates some risk for shareholders and means you should start Cloudflare at a small position in your portfolio, even if you are confident about its growth prospects over the long term.
