Four companies poised to soar with deeper push into cloud

Given the worldwide trends in cloud-based services, the growth potential of these companies is undeniable.

Vikram Barhat 30 August, 2017 | 5:00PM

Once viewed with suspicion due to privacy, cost and security concerns, cloud computing has now become an integral part of everyday life. A growing number of individuals and enterprises are sharing, storing, analysing and accessing data within the cloud ecosystem consisting of a network of cloud-computing companies.

As businesses look to slash costs, improve agility and operational flexibility, they are spending increasingly on cloud computing -- online networks of remote servers used to store, retrieve and process data. By all accounts, the trend is likely to accelerate over the next several years.

A recent report from research firm IDC projected worldwide spending on the public cloud to reach US$122.5 billion in 2017, up 24.4% from the year before. IDC forecasts that spending will reach US$203.4 billion worldwide by 2020. Another report by IT research firm Gartner Inc. forecasts that the public cloud services market will grow 18% this year to total US$246.8 billion, reaching US$383.3 billion by 2020.

Given the worldwide trends in cloud-based services, growth of select cloud-oriented companies is undeniable. Differentiated, high-quality products, dominance across enterprise IT space, a growing customer base and rapid technological advances conspire to create a long runway of growth for the leading companies, making them sound long-term investment choices, according to Morningstar equity research. Inc
Ticker: AMZN
Current yield: -
Forward P/E: 74.4
Price: US$949.36
Fair value: US$1,200
Data as of August 29, 2017

The world's largest online retailer with US$136 billion in net sales in 2016,  Amazon (AMZN) derives 18% of sales from media products,72% from electronics and other general merchandise, while 10% is contributed by its cloud computing division Amazon Web Services (US$12.2 billion in 2016), advertising and cobranded credit cards. The company recently acquired U.S. supermarket chain Whole Foods to expand into the US$700 billion food retail market.

Amazon has built a competitive advantage matched by few in the consumer sector and will reshape retail, digital media and enterprise software for years to come, says a Morningstar equity report. "Amazon's public cloud computing offerings possess more than four times the computing capacity in use than the next 14 largest providers combined (according to Gartner statistics), providing the company with scale advantages and often making it the preferred name for corporations looking to reduce information technology expenditures," says the report.

Amazon Web Services is one of the company's fastest growing businesses, which generated US$916 million in operating income in the second-quarter, on revenue of US$4.10 billion -- a 42% year-over-year increase. Moreover, having racked up US$12.2 billion in revenue in 2016, AWS is forecasted by Morningstar to grow annual revenue at 30% over the next five years. "With recent investments for additional capacity and other innovations, we expect AWS to become an increasingly positive gross margin contributor," says Morningstar sector strategist, R.J. Hottovy, who puts the stock's value at US$1,200. Inc
Ticker: CRM
Current yield: -
Forward P/E: 58.9
Price: US$93.22
Fair value: US$109
Data as of August 29, 2017

The largest pure-play cloud computing company in the world, (CRM) offers customer relationship-management service to businesses. Though the firm is best known for its salesforce automation services, it has diversified its revenue stream into three clouds -- sales, service and applications -- each of which generates more than US$1 billion in annual revenue, along with a fourth (marketing) which is poised to reach the billion-dollar revenue mark soon. The cloud-computing pioneer has established itself as a dominant player in pure-play software-as-a-service (SaaS). It generates 75% of its sales from the Americas and 25% from the rest of the world.

Salesforce has created a product portfolio that spans the key pillars of customer relationship management (CRM), says a Morningstar report, noting that "enterprises will increasingly turn to cloud computing to eliminate costly IT infrastructure and maintenance costs, creating a long runway for growth in each of Salesforce's product verticals."

Morningstar equity analyst Rodney Nelson pegs the stock's fair value at US$109 and asserts that "given the tenure and strong reputation that Salesforce holds over its larger software contemporaries as a cloud software vendor, the firm will continue to take share in these verticals."

Nelson projects a compound annual revenue growth rate of 12% over the next 10 years, led by service cloud and app cloud, "as users across the enterprise continue to flock to the Salesforce platform" for a range of applications.

Microsoft Corp
Ticker: MSFT
Current yield: 2.14%
Forward P/E: 20.3
Price: US$72.80
Fair value: US$83
Data as of August 29, 2017

 Microsoft (MSFT) is a global tech giant that provides software, hardware and services. The firm generates 25% of sales from its intelligent cloud segment which includes Azure, Windows Server OS and SQL Serve. Productivity and business processes, and personal computing represent 28% and 46% of sales respectively.

"Microsoft has quickly emerged as one of the most important cloud computing companies in the world," says Nelson. "Azure has established itself as the number-two public cloud platform behind  Amazon (AMZN), and it should continue to garner significant user growth as Microsoft leverages Azure-hosted software such as Office 365 and Dynamics."

Public cloud, he adds, represents a monumental opportunity for Microsoft as new workloads increasingly shift to the cloud. The company's most recent earnings report notes that its annualized cloud computing revenue run rate exceeds US$18.9 billion, bringing it close to its target of US$20 billion by 2018. In corporate parlance, "run rate" is current financial information on which future performance predictions are based.

CEO Satya Nadella, who previously headed the cloud division, has been steering Microsoft toward "a cloud-first, mobile-first company that embraces developers and enterprises," says Nelson, who recently raised the stock's fair value from US$77 to US$83.

The firm's multifaceted public cloud service, Azure, a division whose revenue grew 90% in the last quarter, provides substantial growth opportunities. "We now have a rosier growth outlook for Microsoft's Azure, as we believe the service is poised to become one of two long-term strategic vendors that enterprises turn to for the bulk of their IT infrastructure needs," says Nelson,

Microsoft recently acquired cloud computing firm Cycle Computing as part of its efforts to bulk up its cloud business.

Adobe Systems Inc
Ticker: ADBE
Current yield: -
Forward P/E: 29.6
Price: US$152.09
Fair value: US$155
Data as of August 29, 2017

 Adobe (ADBE) develops and sells software and services for content creation and the measurement of digital advertising and marketing. The company operates three business segments: digital media, which features a range of applications housed in Creative Cloud, such as Photoshop and Lightroom; digital marketing, which includes Adobe Analytics, Media Optimizer and Campaign Manager; and print and publishing.

"The firm's seamless transition to the cloud has unlocked new opportunities as content becomes an increasingly valuable asset class," says a Morningstar report, adding that the company generates the bulk of its revenue through the digital media segment.

The number of Creative Cloud's total subscribers has exceeded 6 million, and there's potential to add millions more. Nelson says Creative Cloud "provides more-attractive price points, greater revenue visibility and shorter upgrade cycles, further locking in customers from switching to less sophisticated rivals."

The success of Adobe's digital media business, of which Creative Cloud is a leading component, was underscored by a 29% year-over-year growth (US$1.21 billion in revenue) in the second quarter. "As consumption for images and video content increases across devices, this will expose more potential users to Adobe, stimulating long-term growth for Creative Cloud," says Nelson, who recently raised the stock's fair value from US$130 to US$155.

Despite being late to the marketing cloud, Adobe has managed to gain a leadership position and has "eclipsed the US$1 billion mark in annual recurring revenue," says Nelson, who attributes Adobe's sustainable competitive advantage, or wide moat, primarily to its monopoly in creative software solutions regarded as the gold standard for both creative professionals and novices.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Adobe Inc277.85 USD-1.21 Inc1,793.64 USD-1.53
Microsoft Corp139.44 USD-1.16 Inc155.20 USD1.04

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Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.