Cloud computing stocks have been an interesting case this year. Although demand for cloud computing continues to surge, many of the stocks in this industry have sputtered.
One of the reasons is the stocks have become too expensive and overvalued after three years of bull market gains. But there are other reasons specific to cloud stocks. Many are dealing with capacity constraints to handle the high demand, which has hurt their ability to maximize profits.
Also, cloud computing stocks are spending a ton of money, more than they have in the past, on building out their AI infrastructure to handle the capacity constraints. However, many investors are questioning whether these enormous capital expenditures are going to produce adequate returns or just eat into free cash flow, compress margins, and stunt earnings. Others contend that the infrastructure investments are necessary for long-term growth.
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In the analyst community, there have been some bullish calls on cloud stocks this month. Here are two cloud stocks that recently were upgraded by Wall Street stock pickers.
1. Arm Holdings
Arm Holdings (ARM 7.98%) is not a cloud computing company, but it serves that industry by providing the designs and licensing them to chipmakers to build their own chips. It is dominant in smartphone chips and has been expanding in the AI data center market.
But earlier this week, Arm announced a new direction for the company, launching its own CPU chip, the Arm AGI CPU, which is built for data centers to handle agentic AI workloads. Meta Platforms has signed on to use the chips along with other customers including Cerebras, Cloudflare, OpenAI, F5 Positron, Rebellions, SAP, and SK Telecom.
This new business would be in addition to its chip designing business. At the March 24 Arm Everywhere event, management projected huge growth from the new chips. Arm is calling for the chips to generate $15 billion annually starting in 2031, raising total revenue to $25 billion and earnings to $9 per share. For comparison, the company is anticipating revenue of about $5 billion this fiscal year.
NASDAQ: ARM
Key Data Points
Analysts at Needham upgraded Arm stock to a buy on the news and set a price target of $200 per share. The stock is currently trading at about $138 per share (as of March 30), so that would be 45% upside for Arm stock.
"We have been on the sidelines on ARM for 2.5 years and now see a series of its high-stakes bets, including raising royalty rates, going into subsystems, and making its own silicon, are working," Needham analysts wrote. "These bold moves should disrupt the existing industry landscape, one of the reasons why we were cautious, but are now transforming ARM for the better in a surprising way. With the rise of agentic AI and the growing role of CPU in AI data centers, we think ARM has become a credible AI play."
While the growth potential is huge, Arm stock is overvalued at 61 times forward earnings. But maybe that will come down after these new growth projections are factored in.
2. CrowdStrike
CrowdStrike (CRWD +0.08%), the cloud-based cybersecurity company, got a significant upgrade from analysts at Morgan Stanley earlier in March. They bumped the rating for CrowdStrike stock to a buy, or overweight, and raised the price target to $510 per share, from $487.
At its current price of $384 per share, the new price target would indicate a 33% return during the next 12 months.
In their assessment, Morgan Stanley analysts said CrowdStrike is positioned to generate 20% annual revenue growth during the next few years. Morgan Stanley noted the growth potential of its Falcon Flex platform, which lets customers bundle services, as opposed to buying them separately. The Flex platform saw annual recurring revenue (ARR) jump 120% in the fiscal fourth quarter.
NASDAQ: CRWD
Key Data Points
CrowdStrike also rolled out its Charlotte AI AgentWorks Ecosystem, which allows customers to use CrowdStrike's development platform and AI models to build their own custom security agents. Amazon, Nvidia, Accenture, Anthropic, Deloitte, Kroll, OpenAI, and Salesforce are among its customers and partners.
CrowdStrike reported fiscal fourth-quarter earnings (ended Jan. 31) in March, with revenue up 23% and overall ARR rising 24%.
While noting that CrowdStrike stock is expensive, Morgan Stanley analysts identified CrowdStrike as "best able to outperform in coming years."
CrowdStrike is trading at about 84 times forward earnings, so it is expensive. But Wall Street is bullish on these two and sees high earnings potential for both. Should you invest in them? It depends on how comfortable you are with those high valuations. It would be preferable to see updated forecasts or revenue projections from the new initiatives at both companies.
