Cloud computing enables users to access and store data and applications online, providing flexibility and accessibility in the digital era. Companies seeking to streamline IT operations, increase scalability, and boost efficiency and competitiveness are driving the ongoing shift to cloud technology.
Given this backdrop, investors could consider adding quality cloud computing stocks, such as Atlassian Corporation (TEAM), Salesforce, Inc. (CRM), and AppLovin Corporation (APP), to their portfolios. Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the cloud computing industry’s prospects.
The increased demand for greater flexibility, scalability, and cost-effectiveness in IT infrastructure drives the ongoing shift to cloud computing. Cloud computing allows businesses to access and store data and applications over the internet rather than on local servers or personal computers. This enables organizations to reduce capital expenditure on hardware and software, improve data security and compliance, and enable remote working.
Apart from the abovementioned companies, the cloud computing transition is transforming the IT landscape, with major players like AWS, Microsoft Azure, Google Cloud Platform, and IBM Cloud leading the way in providing innovative cloud computing solutions to businesses worldwide. Gartner predicts a 13.9% increase in software spending this year, reaching $1.04 trillion.
These companies are increasingly transitioning from traditional software to cloud-based solutions to recover from prior setbacks and embrace advanced technologies like AI, ML, 5G, and IoT. This shift is projected to be a key driver in the market's growth. The U.S. cloud computing market is expected to grow rapidly at a CAGR of 20.3%, reaching $813.01 billion by 2030.
In light of these encouraging trends, let's examine the fundamentals of the three Software - Application stock picks, beginning with the third choice.
Stock #3: Atlassian Corporation (TEAM)
Headquartered in Sydney, Australia, TEAM designs, develops, licenses, and maintains various software products worldwide. Its product portfolio includes Jira Software and Jira Work Management, Confluence, and Trello.
TEAM’s trailing-12-month asset turnover ratio of 0.94x is 50.4% higher than the industry average of 0.62x. Similarly, its trailing-12-month gross profit margin and levered FCF margin of 81.86% and 29.95% are 66.8% and 200.5% higher than the industry averages of 49.07% and 9.97%, respectively.
TEAM’s total revenues for the fiscal third quarter that ended March 31, 2024, increased 29.9% year-over-year to $1.19 billion. Its non-GAAP gross profit stood at $1.01 billion, up 29.1% from the prior year quarter. In addition, its non-GAAP net income rose 68.5% from the year-ago quarter to $232.50 million. Also, its non-GAAP net income per share grew 64.8% year-over-year to $0.89.
Analysts expect TEAM’s revenue and EPS for the quarter that ended June 30, 2024, to increase 20.4% and 6.6% year-over-year to $1.13 billion and $0.61, respectively. The company surpassed Street revenue and EPS estimates in each of the trailing four quarters, which is impressive. Over the past month, the stock has gained 13.6%, closing the last trading session at $178.25.
TEAM’s POWR Ratings reflect this positive outlook. It has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
TEAM has an A grade for Growth, Sentiment, and Quality. It is ranked #41 out of 133 stocks in the Software - Application industry. Click here to see TEAM’s Value, Momentum, and Stability ratings.
Stock #2: Salesforce, Inc. (CRM)
CRM provides Customer Relationship Management technology that brings companies and customers together worldwide. Its service includes sales to store data, monitor leads and progress, forecast opportunities, and more, along with service that enables companies to deliver trusted and highly personalized customer support at scale.
On May 22, 2024, CRM expanded its Einstein Copilot capabilities by introducing new features for marketers and merchants. These features, in addition to its existing functionalities for sales and service, help businesses with daily marketing and merchandising tasks.
CRM also revealed new tools for unifying business and commerce data, along with a new AI-powered personalization decision engine that helps companies personalize customer interactions at every touchpoint using data from any source.
CRM’s trailing-12-month gross profit margin of 76% is 54.9% higher than the industry average of 49.07%. Likewise, its trailing-12-month Return on Common Equity and Return on Total Capital of 9.34% and 5.71% are 118.7% and 111.2% higher than the industry averages of 4.27% and 2.70%, respectively.
For the fiscal first quarter that ended April 30, 2024, CRM’s total revenues increased 10.7% year-over-year to $9.13 billion. Its free cash flow rose 43.2% from the year-ago quarter to $6.08 billion. For the same quarter, its non-GAAP net income stood at $2.41 billion and $2.44 per share, up 43.8% and 44.4% from the prior-year quarter, respectively.
Street expects CRM’s EPS and revenue for the quarter ending July 31, 2024, to increase 11.2% and 7.4% year-over-year to $2.36 and $9.24 billion, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters. CRM has gained 26.4% over the past nine months, closing the last trading session at $256.21.
CRM’s POWR Ratings reflect its robust prospects. It has an overall B rating, which is equivalent to a Buy in our proprietary rating system.
CRM has a B grade for Quality. Within the same industry, it is ranked #23. Get CRM’s Growth, Value, Momentum, Stability, and Sentiment ratings here.
Stock #1: AppLovin Corporation (APP)
APP builds a software-based platform for advertisers to enhance the marketing and monetization of their content in the United States and internationally. It operates through two segments: Software Platform and Apps.
On April 17, 2024, APP’s Adjust unveiled InSight, a machine learning and AI-powered measurement solution that gives marketers a data-driven lens to evaluate campaign effectiveness. With the introduction of InSight, marketers benefit from incrementality analysis to measure the impact of particular marketing actions. This enables marketers to analyze marketing activities easily against target KPIs.
On April 2, 2024, APP and Flip announced that Flip would relaunch its marketing platform for brands utilizing APP’s AXON technology. Additionally, Flip announced that it raised $144 million in a Series C funding round, including a $50 million investment by APP.
With this partnership, APP made its AXON technology available to others through Flip brands leveraging the AI advertising engine via AXON Connect, reaching more customers in measurable ways.
APP’s trailing-12-month asset turnover ratio of 0.65x is 4.2% higher than the industry average of 0.62x. Its trailing-12-month EBITDA margin and levered FCF margin of 38.64% and 28.63% are 293.5% and 187.2% higher than the industry averages of 9.82% and 9.97%, respectively.
APP’s revenue and adjusted EBITDA for the first quarter that ended March 31, 2024, stood at $1.06 billion and $548.77 million, up 47.9% and 100.5% year-over-year, respectively.
For the same quarter, its net income attributable to common stock and net income per share attributable to Class A and Class B common stockholders amounted to $234.78 million and $0.67, respectively, compared to a net loss attributable to common stock and net loss per share attributable to Class A and Class B common stockholders of $4.52 million and $0.01 in the year-ago quarter.
For the quarter that ended June 30, 2024, APP’s revenue and EPS are expected to increase 44% and 230% year-over-year to $1.08 billion and $0.73, respectively. It surpassed consensus revenue and EPS estimates in each of the trailing four quarters. The stock has gained 229.7% over the past year to close the last trading session at $84.82.
APP’s strong fundamentals are reflected in its POWR Ratings. Its overall rating is B, equating to Buy in our proprietary rating system.
It has an A grade for Growth and Quality and a B for Sentiment. It is ranked #20 in the Software - Application industry. Click here for the additional POWR Ratings of APP (Value, Momentum, and Stability).
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CRM shares were trading at $256.65 per share on Tuesday afternoon, up $0.44 (+0.17%). Year-to-date, CRM has declined -2.34%, versus a 15.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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