The cloud and artificial intelligence (AI) markets, which are linked together in myriad ways, have both flourished over the past decade. More companies transferred their data from on-premises servers toward public cloud platforms, which are more secure, scalable, and accessible across a wide range of computing platforms. As these companies store more data on these cloud platforms, more AI applications are being developed to crunch all of that information to make better data-driven decisions.
According to Fortune Business Insights, the cloud computing market could still grow at a compound annual growth rate (CAGR) of 16.5% from 2024 to 2032. Grand View Research expects the AI market to grow at a CAGR of 36.6% from 2024 to 2030.
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Plenty of tech companies are trying to capitalize on the growth of those two markets, but some of them have flimsy business models or narrow moats. So today, we'll focus on three stronger companies that are well-positioned to profit from the growth of the cloud and AI markets: Microsoft (MSFT 0.75%), Datadog (DDOG +0.34%), and Oracle (ORCL 3.78%). Here's why they might be great additions to your investment portfolio this month.
1. Microsoft
Microsoft was once considered a slow-growth tech giant, but its growth accelerated again over the past decade as it expanded its cloud and AI ecosystems. It transformed Azure into the world's second-largest cloud infrastructure platform, and it invested in OpenAI to integrate the AI start-up's popular generative AI tools into its ecosystem. It also rolled out more mobile versions of its cloud-based apps for iOS and Android devices and turned Windows into a hub for its cloud-based services.
NASDAQ: MSFT
Key Data Points
In its latest quarter, Microsoft's total cloud revenue jumped 21% year over year and accounted for 59% of its top line. Most of that growth came from Azure, Dynamics, and its other 365 productivity apps. Its Copilot AI platform, which is powered by OpenAI's generative AI tools, also grew rapidly as it locked in more consumers and businesses.
From fiscal 2024 (which ended last June) to fiscal 2027, analysts expect Microsoft's revenue and EPS to both grow at a CAGR of 14%. That growth should be driven by its cloud infrastructure and AI businesses, its expanding Xbox gaming division, and the accelerating growth of its enterprise-oriented cloud services in a more positive macroeconomic environment. Microsoft's stock might not seem cheap at 31 times forward earnings, but its leadership of the cloud and AI markets might justify that higher valuation.
2. Datadog
Datadog's platform monitors a wide range of computing platforms and aggregates all of that diagnostic data on its unified cloud-based dashboards. That approach makes it much easier for IT professionals to diagnose potential problems. Its new Bits AI generative AI chatbot further streamlines and simplifies that process.
NASDAQ: DDOG
Key Data Points
Datadog's business is maturing, but it turned profitable on a generally accepted accounting principles (GAAP) basis in 2023. From 2023 to 2026, analysts expect Datadog's revenue and EPS to grow at a CAGR of 23% and 77%, respectively.
That growth should be driven by its customers, which generate at least $100,000 in annual recurring revenue (nearly quadrupling from 2019 to 2023), and its healthy dollar-based net retention rate, which stayed in the mid-110s in its latest quarter. Its stock might seem a bit pricey at 70 times forward adjusted earnings, but it could still have plenty of room to grow as more companies streamline their IT operations with its dashboards and AI tools.
3. Oracle
Oracle, like Microsoft, was once considered an also-ran in the tech sector. However, the database software giant reignited its growth by transforming its on-premises software into cloud-based services. It also expanded into the enterprise resource planning (ERP), healthcare IT, and cloud infrastructure markets with big acquisitions. As a result, its total cloud services revenue grew more than 20% annually over the past three fiscal years.
NYSE: ORCL
Key Data Points
From fiscal 2024 to fiscal 2027, analysts expect Oracle's revenue and EPS to rise at a CAGR of 12% and 20%, respectively. That growth should be fueled by the market's warming demand for its cloud-based database and ERP services, as well as expansion of its cloud infrastructure platform to store more data and process more AI applications.
Oracle's cloud infrastructure platform is still much smaller than Amazon Web Services (AWS) and Microsoft's Azure, but it's already gained big customers like Nvidia, Uber Technologies, and ByteDance's TikTok. It's also rolling out more tools to accelerate generative AI applications. It should also continue to expand its cloud and AI ecosystems with more acquisitions.
Oracle's stock trades at 24 times its forward adjusted earnings, which seems reasonable relative to its growth potential in the cloud and AI markets. It's not an exciting growth stock, but it should steadily head higher over the next few years.
