Cloud computing improves operational efficiency by providing on-demand access to infrastructure, platform, and software services. Businesses can spin up cloud servers in minutes while avoiding the cost and complexity of managing those servers in private data centers.
The vast majority of global IT spending goes toward on-premises systems today, but experts expect cloud adoption will proceed at a rapid pace over the next decade. In fact, consultancy Future Market Insights estimates that cloud services revenue will grow at an average rate of 21% annually to reach $4.4 trillion by 2033. Cloudflare (NET -1.56%) and Amazon (AMZN +15.32%) are both well positioned to benefit from that growth. Here's why their stocks are worth buying right now.
NYSE: NET
Key Data Points
1. Cloudflare
Cloudflare provides a broad range of cloud services that accelerate and secure corporate applications and infrastructure. It also provides compute and storage solutions through its developer platform, enabling clients to build and deploy performant applications and websites directly on its network.
Cloudflare has a simple competitive advantage: It operates the fastest cloud network and developer platform on the planet. Its servers can reach 95% of internet users worldwide within 50 milliseconds. The advantage of superior performance, coupled with an effective freemium pricing strategy, has led to tremendous demand. Cloudflare currently provides cloud services to more than 20% of the web, meaning the company has unparalleled visibility into internet traffic.
Naturally, the company is growing like wildfire. Its customer count increased 16% to 162,000 last year, and its average customer spent 22% more than they did in 2021. In turn, revenue climbed 49% to $975 million, and cash from operations skyrocketed 91% to $123 million. But Cloudflare has hardly scratched the surface of its $125 billion addressable market, so it should be able to maintain that momentum for years to come.
Cloudflare already leads the markets for content delivery network software and edge developer tools, and it is well positioned to gain traction in zero trust security simply because it handles a tremendous amount of internet traffic. Its secure access service edge (SASE) platform, Cloudflare One, is a particularly noteworthy product. SASE platforms protect and connect users to corporate resources from any device or location, and IT consultancy Gartner says 80% of enterprises will adopt SASE products by 2025, up from 20% that used them in 2021. That puts Cloudflare in front of a big opportunity.
For that reason, management expects revenue to grow fivefold over the next five years. That makes its current price-to-sales ratio of 19.1 look reasonable, especially compared to its three-year average of 41.9 times sales. That's why patient investors should open a small position in this growth stock today.
NASDAQ: AMZN
Key Data Points
2. Amazon
Global retail sales growth decelerated sharply last year as consumers battled high inflation, and Amazon saw its revenue growth slow accordingly. But higher costs for fuel and electricity made the situation especially difficult for the company, driving up expenses across its logistics and data center operations. Taken together, those headwinds contributed to Amazon's relatively weak financial results last year. Revenue increased by 9% to $514 billion, and cash from operations climbed by 1% to $46.8 billion.
Yet, investors have good reason to be bullish about Amazon. It's well positioned to re-accelerate growth as economic conditions improve and spending rebounds. Part of that stems from its dominance in e-commerce. Amazon runs the most popular online marketplace in the world, and global retail e-commerce sales are expected to increase at an average of 13% annually through 2030, according to Ameco Research. But its opportunities in cloud computing and digital advertising are even more compelling.
Amazon Web Services (AWS) has long dominated the cloud services market. It accounted for 33% of cloud infrastructure and platform services (CIPS) spending in the fourth quarter, 10 percentage points more than runner-up Microsoft, and it was recently named the CIPS leader by Gartner for the twelfth consecutive year. AWS has often set the pace for innovation in the market, and it offers a greater range of capabilities than any other provider. That puts the company in a great position.
Not only is the cloud services market growing quickly, but cloud services also come with far higher margins than retail sales. AWS achieved an operating margin of 28.5% last year, but Amazon seldom reports an operating margin above 5% for its retail business. That means the company should become increasingly profitable as the share of total revenue that comes from cloud services grows.
Digital advertising also comes with higher margins than retail, and Amazon has quietly become the fourth-largest ad tech company in the world, an accomplishment made possible by its marketplace. Specifically, Amazon has two things all advertisers want: engaged consumers and data that can be used to target campaigns. That creates a third growth engine for the company. The ad tech market is expected to grow at an average rate of 13% annually through 2030, according to Grand View Research.
Here's the bottom line: Amazon is a key player in three markets that are growing at double-digit percentage paces, so investors can reasonably expect double-digit percentage revenue growth for the foreseeable future. Yet, shares currently trade at 2 times sales -- an inexpensive valuation given the potential upside. That's why this stock is worth buying.
