After an impressive run-up to start the year, the major market indexes have been taking a breather as investors have stepped back to assess the ongoing economic recovery. The Federal Reserve Bank has paused its campaign of interest rate hikes in the face of evidence that inflation is finally easing. Investors have also been monitoring a pullback in cloud spending and are still holding out hope for a so-called "soft landing," with the economy narrowly avoiding a recession.
With that as a backdrop, Snowflake (SNOW 3.69%) had climbed 10%, DigitalOcean Holdings (DOCN 3.30%) had jumped 10.3%, and MongoDB (MDB 4.83%) had risen 12.8% as of 12:49 p.m. ET on Tuesday.
A check of all the usual sources -- regulatory filings, earnings results, and changes to analysts' targets -- turned up little in the way of company-specific news (more on that in a bit). Rather, it was the robust results of several cloud competitors that helped propel them higher.
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A rebound in cloud spending?
First out of the gate this morning was Datadog. The cloud monitoring and security specialist reported third-quarter revenue that grew 25% year over year to $548 million, while adjusted earnings per share (EPS) surged 96% to $0.45. This was well ahead of analysts' consensus estimates of $524.2 million and EPS of $0.34, and investors let out a collective cheer.
Further fueling the rally were results delivered by Alteryx. The cloud analytics automation specialist generated revenue that grew 8% to $232 million while delivering an adjusted profit of $0.29, compared to a loss per share of $0.05 in the prior-year quarter. This was also well ahead of Wall Street's expectations for revenue of $210.2 million and an adjusted loss per share of $0.06.
The stronger-than-expected performances delivered by these two cloud providers set the stage for a broader rally in cloud stocks today, as it gave investors confidence that the slump in cloud adoption might finally have passed.
Are cloud stocks a buy?
There was one bit of company-specific news that helped fuel gains for DigitalOcean. The company earned a rare double upgrade from Goldman Sachs, which upgraded the stock to buy from sell while maintaining its price target of $33, which represents potential gains for investors of 38% compared to Monday's closing price. In the wake of the company's strong results last week, the analysts believe that "cyclical risks are priced into the shares." Furthermore, analysts believe that the company's acquisition of Paperspace and the opportunity from Cloudways are currently being underestimated by investors.
That said, a general recovery in cloud spending will benefit each of these cloud providers:
- Snowflake's cloud-native data warehouse and analytics services are priced using a consumption-based model -- similar to Datadog. A rebound in pay-as-you-go spending bodes well for Snowflake when the company reports its results later this month.
- MongoDB offers cloud-centric database solutions that are much more robust than traditional databases. The company announced yesterday that it was collaborating with Amazon Web Services (AWS) to help developers accelerate app development using coding tools fueled by artificial intelligence (AI). This, combined with a recovery in cloud spending in general, could provide a boost for MongoDB.
- DigitalOcean offers cloud infrastructure services that address the unique needs of small- and medium-sized businesses (SMBs) and don't require specialized training to use. DigitalOcean reported a "stabilization" in its key revenue growth metrics last week, which sent the stock higher.
There is, of course, the matter of valuation to consider. While none of these stocks is necessarily cheap, they are trading at a significant discount to their historical averages. Snowflake, MongoDB, and Digital Ocean are currently selling for 14 times, 13 times, and 3 times next year's sales, respectively, when a reasonable price-to-sales ratio is generally considered to be between 1 and 2.
By this measure, DigitalOcean is the most compelling opportunity. That said, valuation shouldn't be viewed in a vacuum. Investors frequently award a higher valuation to companies with continued strong revenue growth -- particularly in the face of economic headwinds. For example, Wall Street expects Snowflake to generate revenue growth of roughly 67% annually over the coming five years, showing that it's deserving of a premium.
For investors planning to hold their shares for at least three to five years, each of these stocks represents an intriguing opportunity and could generate impressive gains over time.
