The Nasdaq composite is up by approximately 35% this year, which is primarily thanks to cloud stocks. The cloud market, which reached more than $480 billion last year, is expected to grow to about $1.55 trillion by 2030, according to Grand View Research, a compound annual growth rate of 14%.
As we begin August, many investors -- particularly risk-averse ones -- might lean toward the megacaps in the field, such as Amazon or Microsoft. While investors can certainly choose that option, there could be more profit potential in smaller stocks such as CrowdStrike (CRWD 2.03%), DigitalOcean (DOCN 3.30%), or Snowflake (SNOW 3.69%).
1. CrowdStrike
The cloud cannot exist without cybersecurity, as limiting network access is critical to its success. While numerous companies compete in this space, CrowdStrike, which earned its name with its ability to leverage crowdsourced data, has attracted attention because of its ability to secure endpoints, laptops, servers, smartphones, and other devices that access networks.
The company then derives additional revenue by selling modules, or security add-ons. About 62% of its customers use at least five modules, and its dollar-based net-retention rate continues to exceed 120%. This means existing customers increase their spending on the platform by more than 20% on average.
In its first quarter of fiscal 2024 (ended April 30), the $693 million in revenue rose 42% year over year. Also, its $491,000 in net income was the first generally accepted accounting principles (GAAP) profit in company history, a factor that should help the stock among investors who have become less tolerant of losses.
Admittedly, CrowdStrike may face some headwinds. The forecast fiscal 2024 revenue of just over $3 billion would mean a 35% revenue increase, a slowdown from current levels. And the 15 price-to-sales (P/S) ratio, while low by historical standards, is at a 2023 high. But as cloud adoption continues, it should mean CrowdStrike grows at a rapid clip for a long time to come.
2. DigitalOcean
Considering DigitalOcean's need to restate earnings for its first quarter, one might think it is crazy to want to buy DigitalOcean stock. Indeed, it appears to have overstated its income tax expense by $18 million in Q1. Furthermore, it did not want to report a net income for Q2 pending this income tax issue. Not surprisingly, the stock plunged on this news.
But despite its problems, DigitalOcean has stood out by finding a market not well served by the cloud giants -- small and medium-sized businesses (SMBs). DigitalOcean gives SMBs transparent pricing, allowing them to save by buying only the cloud services they need.
Additionally, for SMBs without a deep in-house knowledge base, the company offers the DigitalOcean community. This allows these businesses to consult a vast information library or other DigitalOcean customers to solve problems without hiring high-priced experts.
Moreover, while this financial reporting news is disconcerting, the mistake could become a buying opportunity. The Q2 revenue of $170 million, which rose 27% from year-ago levels, may persuade investors to take a chance on the stock. It also expects non-GAAP net income to come in ahead of previous guidance.
Finally, its P/S ratio now stands at about 6. This takes the multiple close to record lows, and if one is willing to take a chance amid this uncertainty, the accounting issue may allow investors to increase returns in the end.
3. Snowflake
One critical part of the cloud is data management, and Snowflake seems to offer the best product for this task. Its product stores, secures, and limits access to data sets. It stands out as "plug and play," making setup easy. It is also interoperable, meaning it holds no bias toward cloud infrastructures supported by a specific company.
Snowflake's popularity continues to grow as it now boasts nearly 8,200 customers. Also, its net-dollar retention is an astounding 151%, which bodes well for continued revenue growth.
Given that factor, one can understand why the company estimates a $248 billion total addressable market for the data cloud by 2026. For now, the $624 million in revenue for Q1 of fiscal 2024 (ended April 30) is a small fraction of that. Nonetheless, that revenue grew 48% year over year.
Indeed, Snowflake is not a perfect stock. Its quarterly loss of $226 million increased from year-ago levels, and the rapid revenue growth is probably one reason for the cloud stock's 23 P/S ratio.
However, its sales multiple has never fallen below 20, and the company's revenue levels indicate it has barely begun to capture its revenue. Those factors should help boost Snowflake over time despite its considerable expense.
