Stocks to buy

Thanks to the proliferation of cloud computing stocks and their underlying technologies, it’s easy to take the segment for granted. However, these enterprises undergird the digital transformation – that is, the integration of computer tech across all facets of society. We’re not quite there yet. However, with advancements in various digitalization solutions – including artificial intelligence – it’s probably only a matter of time.

Indeed, Grand View Research reminds us that the global digital transformation market size reached a valuation of $731.13 billion in 2022. Moreover, its analysts project that the sector will witness a compound annual growth rate (CAGR) of 26.7% from this year to 2030. By the end of the forecasted period, the industry may generate total revenue of nearly $4.62 trillion. That’s a major economy in and of itself. Therefore, investors should seriously consider adding these cloud computing stocks to their portfolios.

ADBE Adobe $379.16
MSFT Microsoft $280.51
IBM IBM. $129.71
SNOW Snowflake $137.46
ZS Zscaler $110.70
RNG RingCentral $29.33
DDOG Datadog $68.10

Adobe (ADBE)

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A multinational computer software firm, Adobe (NASDAQ:ADBE) historically specializes in programs for the creation and publication of various media content, including graphics, photography, and animation among others. Having shifted its business model for its Creative Cloud suite of applications to Software as a Service (SaaS), Adobe represents a powerhouse in the ecosystem of cloud computing stocks.

On a financial basis, ADBE stock cuts an attractive profile. For instance, the company features a stout balance sheet, with an Altman Z-Score of 11.3, indicating extremely low bankruptcy risk within the next two years. Operationally, the company benefits from a three-year revenue growth rate of 18.1%, outpacing 72.5% of the software industry.

In terms of profitability, Adobe features a net margin of 26.32%. This stat beats out 94.9% of sector rivals. Plus, its return on equity (ROE) comes in at a lofty 33.65%, reflecting a high-quality business. Finally, Wall Street analysts peg ADBE as a consensus moderate buy. Their average price target comes out to $393.55, implying over 5% upside potential.

Microsoft (MSFT)

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Ranked among the top players in the broader tech space, Microsoft (NASDAQ:MSFT) made significant inroads over the years as a premiere example of cloud computing stocks to buy. Primarily, whether as a student or professional, it’s difficult to operate without having some basic understanding of Microsoft Office programs. Also making the transition as a SaaS provider, the company already owns large swathes of digital transformation.

Fundamentally, what makes MSFT appealing as one of the cloud computing stocks is its financial resilience. First, the underlying company enjoys a stable balance sheet, undergirded by an Altman Z-Score of 8.86, reflecting a very low bankruptcy risk. Operationally, Microsoft posts a three-year revenue growth rate of 17.4%, above 71.29% of sector players.

Also, its free cash flow (FCF) growth rate during the same period comes out to 20.5%, above the sector median of 9.1%. Plus, its net margin blows past most other rivals at slightly over 33%. Lastly, covering analysts peg MSFT as a consensus strong buy. Their average price target is $292.48, implying nearly 6% upside potential.

IBM (IBM)

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An iconic legacy tech giant, IBM (NYSE:IBM) initially rested on its laurels a bit longer than it should have. As a result, several other cloud computing stocks whizzed past “Big Blue,” relegating it to a rather irrelevant place. However, the company has done an admirable job of investing in new technologies as well as key acquisitions. Today, IBM ranks among the top hybrid cloud-computing enterprises.

To be fair, IBM represents a higher-risk profile compared to the top two cloud computing stocks. Notably, its balance sheet features middling stability. Also, its Altman Z-Score pings at 2.81, which sits in the gray zone. Operationally, the company could use improvement in its revenue trek, though it does feature an elevated operating margin of 13.47%.

On the positive side, the market prices IBM at a forward multiple of 13.49. As a discount to projected earnings, Big Blue ranks better than 79.13% of the competition. Also, it has a dividend yield of 5.1%. In closing, analysts peg IBM as a consensus hold. However, their average price target comes out to $143.56, implying 11% upside potential.

Snowflake (SNOW)

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A cloud computing-based data cloud enterprise, Snowflake (NYSE:SNOW) offers a data storage and analytics service. Known as Data as a Service (DaaS), this business model allows corporate users to store and analyze data using cloud-based hardware and software. As well, Snowflake distinguishes itself by facilitating rapid scalability for its clients.

Unlike the established (but with lower upside potential) cloud computing stocks, Snowflake will require investor patience. In the trailing year, SNOW gave up nearly 43% of equity value. Despite this, the market still prices SNOW at a forward multiple of 215. Obviously, that’s significantly overvalued relative to its peers.

That said, Snowflake enjoys significant strengths in the balance sheet. For example, its cash-to-debt ratio pings at 15.93 times, ranking better than 69% of the field. Also, its three-year revenue growth rate stands at 80%, though this will surely decline over time. Moving to expert assessment, covering analysts peg SNOW as a consensus moderate buy. Their price target averages out to $184.17, implying over 36% upside potential.

Zscaler (ZS)

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A cloud security company, Zscaler (NASDAQ:ZS) offers enterprise cloud security services. So far this year, the market responded modestly well to the business, with ZS stock gaining almost 2%. However, the tech fallout of 2022 greatly (and negatively) impacted Zscaler. Unfortunately, shares find themselves down 53% in the past 365 days.

Nevertheless, for speculators, ZS could be a high-risk, high-reward opportunity among cloud computing stocks. Notably, Zscaler’s three-year revenue growth rate hit 46.7%, blowing past 92.64% of the competition. Also, its FCF growth rate during the same period comes in at 93.7%, ranked better than almost 96% of the field. However, that’s about where the good news dries up. Zscaler’s profit margins sit well below breakeven, posing viability concerns. On the balance sheet, its debt-to-equity ratio is 2.3 times, soaring unfavorably above the sector median of 0.22 times.

Nevertheless, analysts regard ZS as a consensus moderate buy. Their average price target stands at $152.93, implying nearly 37% upside potential.

RingCentral (RNG)

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A provider of cloud-based communication, RingCentral (NYSE:RNG) also offers collaboration products and services for businesses. While RNG stock got off to an auspicious start to the new year, since mid-Feb., circumstances got quite volatile. Therefore, RNG slipped nearly 21% from the Jan. opener. As well, against the trailing year, it hemorrhaged a staggering 77%.

Clearly, RNG is only appropriate for those that want to gamble with their cloud computing stocks. Further, the financials suggest that prospective investors must exercise extreme patience. For example, RingCentral suffers from a troubled balance sheet. Not shockingly, it fails to generate profits. On the other hand, the company’s three-year revenue growth rate pings at 24.3%, above nearly 80% of the software industry. Also, it trades at 1.32 times sales, below the sector median of 2.33 times.

Looking to the Street, analysts peg RNG as a consensus moderate buy. Their average price target stands at $50.57, implying over 77% upside potential.

Datadog (DDOG)

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An observability service for cloud-scale applications, Datadog (NASDAQ:DDOG) provides monitoring of servers, databases, tools, and services through a SaaS-based data analytics platform. While it’s not quite as volatile as RingCentral above, it contributed more than its fair share of red ink. Since the January opener, DDOG fell 9%. In the past 365 days, it’s down 56%.

However, for those seeking to swing for the fences, Datadog might attract speculators. Let’s get the bad news out of the way first. Against most common metrics such as projected earnings, sales, and book value, DDOG is significantly overvalued. Also, it struggles in the profitability department.

On the positive front, Datadog’s Altman Z-Score comes out to 8.93, reflecting a very low bankruptcy risk. Also, its three-year revenue growth rate pings at 27%, outpacing 82.59% of the competition. Lastly, covering analysts peg DDOG as a consensus strong buy. Their average price target stands at $105.05, implying over 55% upside potential.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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