Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) exceeded Wall Street expectations in their latest quarterly results, driven by a surge in cloud revenue fueled by increased use of artificial intelligence (AI) services, Bloomberg reported. Alphabet’s shares soared up to 12%, marking its biggest gain since July 2015 and pushing its valuation past $2 trillion. Meanwhile, Microsoft rose as much as 3.5%. Still, there are some cloud computing stocks for investors to sell in this climate.
The bear case for these companies is that there could be high opportunity costs for holding onto them. Alternatives like MSFT and GOOG could prove to be too attractive. They offer the promise of high returns and being at the forefront of the AI revolution.
On the other hand, some of these cloud computing stocks peaked during the pandemic and failed to return to Earth. That means they are still overvalued in comparison to their long-term growth potential. So here are three cloud computing stocks to avoid.
Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) may experience challenges in maintaining its rapid growth rate as its post-pandemic reality starts to sink in.
ZM reported fourth-quarter earnings and revenue that exceeded expectations. Earnings at $1.42 per share on an adjusted basis were up 16% year-over-year while revenue reached $1.146 billion, a 2.6% increase from the previous year. This outperformance was attributed to the solid adoption of Zoom’s new Contact Center offering, upmarket traction, Zoom Phone and recent AI capabilities.
Still, I believe that ZM’s valuation is presently too high to justify its stock price at around $62 per share. Its price-to-earnings (P/E) ratio is rich at 29.95 times earnings, not that much different from Microsoft at 35 times. Framing this is that MSFT’s growth potential is far higher according to analysts. Its revenue is expected to climb 17% while Zoom is only expected to rise around 5%.
The opportunity cost of holding onto ZM may be too steep when one compares what else the market has to offer, along with it being traded at a premium to its earnings.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) operates in a highly competitive cloud data warehousing market, facing challenges in differentiating its offerings and maintaining profitability.
The cloud data warehousing market is crowded with competitors like Amazon’s (NASDAQ:AMZN) Redshift, Google BigQuery and Microsoft Azure SQL Data Warehouse. These established players already have a significant market share and robust offerings, making it difficult for Snowflake to differentiate itself.
Also, the underlying technology used in data warehousing solutions has become increasingly standardized. Many competitors offer similar features and functionalities, making an apple-to-apples comparison exceedingly easier.
Perhaps due to SNOW’s lack of a durable competitive advantage, its earnings have been consistently negative. However, analysts expect it could break even within the next 12 months, but then its shares would trade at a high premium, as its forward price-to-sales ratio is 187 times earnings at the time of writing.
Salesforce (CRM)
Salesforce (NYSE:CRM) faces concerns about intensifying competition in the cloud computing space.
Competing with major players like Microsoft and AWS requires Salesforce to continuously innovate and enhance its offerings to stay ahead. Unfortunately, considering who it’s up against, its top-line is unsustainable.
CRM’s revenue growth peaked in 2019 and has gradually found a bottom. This bottom is not expected to be reached until FY2024, and even then that’s a speculative guess as it’s currently in free fall.
CRM’s valuation is also very rich at 65 times earnings. Its balance sheet strength is also dicey with $14.19 billion in cash and $12.59 billion in debt.
There was a time that CRM dominated the cloud computing market in its respective niches. However, I think that those days are long over. It may earn a spot in one’s portfolio, but I think its high valuation makes it a prime target for an attack by short sellers, especially if the market goes thru a cyclical downturn.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.