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Investing in Cloud Computing Stocks

Updated: March 24, 2021, 1:25 p.m.

Cloud computing boomed during the 2010s, but growth in this next-gen IT industry is just beginning. For years, organizations around the globe have been migrating their operations to the cloud -- another way of saying remote data storage -- but the pandemic (and the related rise of working remotely) has accelerated the trend.

Tech researcher Gartner (NYSE:IT) thinks that spending on global cloud computing (as well as edge computing) will increase from more than $250 billion in 2020 to exceed $360 billion in 2022. By the end of the decade, some estimates put total global cloud spending at $1 trillion per year. Cloud computing stocks are thus a top investment theme for 2021.

The Best Cloud Computing Stocks to Invest In

To get started, the best cloud stocks to invest in are the three public cloud giants Amazon (NASDAQ:AMZN), for exposure to Amazon Web Services; Microsoft (NASDAQ:MSFT), for its Azure; and Alphabet (NASDAQ:GOOGL), for Google Cloud. While these companies aren’t pure plays in the cloud industry, all three provide infrastructure and platform services for enterprises looking to improve their operations, as well as a complete ecosystems of software (and partnerships with other software-as-a-service providers).

Beyond the big three, there are more focused companies that provide portfolio exposure to the development of the cloud.

1. Salesforce.com (NYSE:CRM)

When talking about cloud computing, Salesforce needs to be part of the conversation. The customer relationship management specialist was a pioneer in the late 1990s and early 2000s of software that uses cloud technology. Salesforce has since branched out to other areas of enterprise software via organic growth and a steady stream of acquisitions.

In fact, Salesforce’s pending takeover of remote work and collaboration tool Slack (NYSE:WORK) will put it on a collision course with Microsoft. Successful in becoming a full-blown platform for businesses of all sizes, Salesforce may in the next decade realize founder and CEO Marc Benioff’s long-standing goal of becoming one of the largest technology companies in the world. Highly profitable and investing heavily to maximize expansion, Salesforce is a top name in the cloud industry.

2. IBM (NYSE:IBM)

Legacy computing company IBM has a storied history, but it has struggled in the past decade as its legacy operations have held it back in the cloud era. That’s not to say that IBM has no hand in development of modern IT, though. On the contrary, its cloud segment -- jump-started with the acquisition of development platform Red Hat back in 2019 -- is actually one of the largest cloud computing businesses in the world.

Under the guidance of new CEO Arvind Krishna, IBM is beginning a journey to narrow its focus on the cloud. By the end of 2021, it will spin off its struggling managed infrastructure segment as a standalone entity. The IBM that remains will focus on the $1 trillion hybrid cloud opportunity by helping customers migrate their operations over to the largest public cloud platforms, as well as building their own private data centers and corresponding applications. Since IBM’s cloud business has been growing by double-digit percentages in recent years, this narrowing of its focus bodes well for the old tech firm.

3. Zoom Video Communications (NASDAQ:ZM)

Few companies have skyrocketed out of obscurity and into household name status as quickly as Zoom. The video conferencing service has become a household name during the pandemic, helping family members and business teams alike stay in touch from afar. And, as it turns out, many pre-pandemic in-person meetings weren’t all that necessary after all. Zoom is poised to continue on as a staple of corporate communications long after the pandemic comes to an end.

Zoom is also benefiting from how personal communications are changing. Mobile phone service is a modern must-have, but cloud-based video interactions could be a serious disruptor of traditional telecommunications companies in the years ahead. As access to the internet expands, staying in touch could increasingly become untethered from a phone company and favor cloud software providers instead. Zoom is in pole position here and on a mission to make video meetings as good as in-person ones.

4. Veeva Systems (NYSE:VEEV)

Veeva offers myriad services, such as customer relationship management, data management, and compliance for life science organizations (biotech, pharmaceutical, and other healthcare companies). The company is also in the early stages of expanding its scope to cover consumer goods and chemical companies, too. The company's already large addressable market continues to grow.

Veeva's revenue has steadily grown at a double-digit percentage rate for years, and its profitability has expanded at an even faster pace as it increases its efficiency. The company's growth will continue as Veeva brings digital transformation to the massive life sciences industry. Constantly adding new features to its ecosystem, the company provides a top way to gain portfolio exposure to the digitization of healthcare without having to pick a specific winner.

5. Unity Software (NYSE:U)

Netflix (NASDAQ:NFLX) made streaming TV from the cloud an everyday staple, but streaming now encompasses much more than just TV. With the video game industry also migrating to the cloud, Unity Software is helping game developers make the transition. Unity, which had its IPO in 2020, is the largest real-time 3D content creation platform, with millions of creators utilizing its software and billions of apps built with Unity downloaded every year. 3D content isn’t just for video games, though.

Unity has no shortage of growth opportunities. The company is proving itself useful as a tool for graphic designers, engineers, architects, and movie and TV production studios. For example, Volkswagen (OTC:VWAGY) and Toyota Motors (NYSE:TM) are using Unity to create interactive and collaborative auto designs. It’s also a unified service that helps content creators collaborate with each other remotely, deploy their apps, market them, and manage them in real time. The company’s roots are in video games, but it is fast becoming a cloud platform that works across multiple industries. Given the interactive world we live in, Unity looks like a top software service investment for the 2020s.

6. Magnite (NASDAQ:MGNI)

Speaking of streaming TV, lots of new internet-based services have come to market the past couple of years. This has been a boon for digital advertising technology like Magnite, a cloud-based offering that helps production studios and TV services monetize their content via ads. A product of the merger between Telaria and The Rubicon Project in 2020, Magnite followed up its combination with the acquisition of connected TV ad tech outfit SpotX and counts production studios such as Disney (NYSE:DIS) among its customers.

The SpotX takeover makes Magnite the world’s largest independent sell-side ad platform for internet-connected TV. Investors looking to bet on the mass move to internet-based video need not pick the best streaming media stocks individually since Magnite counts most of them as customers already. In the coming years, streaming services will pick up millions of new household subscribers and record billions of additional hours spent viewing TV -- creating a huge opportunity for Magnite as it manages connected TV advertising activity. Still a small company in a digital marketing industry worth hundreds of billions of dollars annually, the sky’s the limit for Magnite.

Investing in cloud ETFs

For investors not interested in attempting to pick the best cloud stocks, ETFs are also an option. The First Trust Cloud Computing ETF (NASDAQ:SKYY) is the largest cloud ETF around, with about $7 billion in assets under management. The fund is a basket of 64 cloud infrastructure and software stocks and has an annual expense ratio of 0.6% (costing $6 a year for every $1,000 invested).

A more recent newcomer is the Global X Cloud Computing ETF (NASDAQ:CLOU). Since the fund launched in early 2019, GlobalX’s cloud ETF has outperformed First Trust’s offering due to its more narrow focus on just 36 stocks (most of them software companies). The fund is smaller, with less than $2 billion in assets under management, and it has a slightly higher annual expense ratio of 0.68%.

Cloud computing is a long-term growth trend

Cloud computing is picking up steam in the wake of the COVID-19 pandemic. More efficient than legacy IT, it enables new technology such as AI and affords organizations and their employees more flexibility with things like remote work. The cloud is quickly becoming basic infrastructure of the future.

As is the case with all high-growth stocks, though, investing in cloud companies will have bumps in the road. Investors should stay focused on the long-term potential, not just stock price performance over the course of a year or two. Nevertheless, this long-term secular growth trend is poised to remain intact for the next decade and beyond. Cloud stocks should be a top investor priority in 2021.

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