10 Cloud Computing Stocks to Watch As AI Arms Race Is Underway

Published on July 12, 2023 at 8:49 am by Fatima Farooq in Hedge Funds, News

In this article, we will be taking a look at 10 cloud computing stocks to watch as the AI arms race is underway. To skip our detailed analysis of the latest developments in this space, you can go directly to see the 5 Cloud Computing Stocks to Watch As AI Arms Race Is Underway.

This year, all any tech investor can talk about is artificial intelligence (AI). This trend was brought about primarily due to the launch of an AI arms race with, some might argue, the launch of ChatGPT. When OpenAI released the now-popular chatbot for free to the public, no one could have guessed that it would revolutionize the AI industry – but it did. Now every company is rushing to partake in this area, entering into deals and partnerships, making acquisitions, and above all, trying their best not to become obsolete.

China Enters The Fray

After ChatGPT and OpenAI sparked an AI race in the US, Chinese companies have also begun to express an interest in the area. This April, for instance, China’s Alibaba Group Holding Limited (NYSE:BABA) unveiled its own ChatGPT-style technology under the name Tongyi Qianwen. This large language model has been trained similarly to ChatGPT on large amounts of data so it can generate content. According to CNBC, the company began rolling out this product in June. The company’s cloud computing division is taking the lead in its AI charge, and it commented that Tongyi Qianwen is set to be integrated into a “digital assistant called Tingwu.”

Other moves taken by Chinese companies in the AI race include Baidu, Inc.’s (NASDAQ:BIDU) launch of its own AI chatbot, called Ernie Bot, as a potential rival to ChatGPT. Alongside these companies, other Chinese tech giants have also commented that they are in the process of developing ChatGPT-style AI technologies as well. This interest from Chinese companies when it comes to the AI race is unsurprising, especially considering the long-standing tech war that has been raging on between the US and China. According to a Wall Street Journal article from this July, this tech war is now beginning to include cloud computing and AI companies as well, as the Biden administration draws up a proposal to restrict Chinese companies’ access to US cloud computing services. Provided this proposal goes forward and is accepted, cloud computing services providers within the US, such as Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN), will be bound to ask the government’s permission before they provide cloud computing services using advanced AI chips to Chinese customers. Such a development is making it imperative for investors to keep a close eye on cloud computing stocks today to see how they may be affected.

Will Cloud Computing Companies Benefit From The AI Arms Race?

Cloud computing and AI are interconnected in many ways, with both helping each other develop and grow to new heights. AI can help cloud computing be cost-effective, better at data management, more productive, automated, and secure. For example, AI has proven to help Amazon.com, Inc.’s (NASDAQ:AMZN) Glacier storage service cut costs by using machine learning to identify and remove duplicate data. In the same vein, cloud computing has helped AI develop further. For example, cloud delivery models like Infrastructure-as-a-Service models have been developing an infrastructure environment for AI practitioners.

The growing and undeniable interconnectedness of these fields shows that cloud computing companies and stocks may be set to benefit from the ongoing AI race. As more companies rush to incorporate AI into their businesses, cloud computing will be also brought into the spotlight as an active enhancer of AI products. According to CNBC, companies like Microsoft Corporation (NASDAQ:MSFT) noted the benefit their cloud businesses will see due to the AI craze as early as this February. In Microsoft Corporation’s (NASDAQ:MSFT) case, the company’s cloud computing division, which goes by the name Azure, is expected to help it monetize its AI capabilities further. Keeping this in mind, we have compiled a list of some of the top cloud computing companies on the market today, selected from the holdings of one of the best cloud computing ETFs, The Global X Cloud Computing ETF (CLOU). These are the stocks investors should keep an eye on to see which way they swing in light of US-China tensions and the AI arms race.

Cloud Computing Stocks to Watch As AI Arms Race Is Underway

Pixabay/Public domain

Our Methodology

To select the stocks for our list, we went through the top holdings of The Global X Cloud Computing ETF (CLOU) and shortlisted them based on the number of hedge funds holding stakes in each company by using Insider Monkey’s hedge fund data for the first quarter. We then ranked the top 10 stocks based on their upside potential as of July 5, from the lowest to the highest, using data sourced from TipRanks.

Cloud Computing Stocks to Watch As AI Arms Race Is Underway

10. Shopify Inc. (NYSE:SHOP)

Number of Hedge Fund Holders: 66

Upside Potential: 0.43%

Analyst Price Target: $63.73

Shopify Inc. (NYSE:SHOP) is an information technology company providing a commerce platform and services internationally. It is based in Ottawa, Canada.

There were 66 hedge funds long Shopify Inc. (NYSE:SHOP) in the first quarter. Their total stake value was $2.5 billion.

Shopify Inc. (NYSE:SHOP) is a completely cloud-based e-commerce company, and it has also partnered with Google Cloud to provide its merchants with more competitive computing technologies.

Andrew Boone, an analyst at JMP Securities, reiterated a Market Outperform rating on Shopify Inc. (NYSE:SHOP) shares on June 22. The analyst also maintains a $70 price target on the stock.

ARK Investment Management was the most prominent shareholder in Shopify Inc. (NYSE:SHOP) at the end of the first quarter, holding 13.9 million shares in the company.

In its first-quarter 2023 investor letter, RiverPark Advisors said the following about Shopify Inc. (NYSE:SHOP):

“Shopify Inc. (NYSE:SHOP): Shopify shares were a top contributor in the quarter as the market focused on the company’s recent price increases and its ongoing market share gains in e-commerce gross merchandise volumes (GMV). Earlier in the quarter the company reported better-than-expected 4Q results, with 26% revenue growth and $248 million of FCF (at a 14% margin), significantly better than the Street consensus of -$109 million.

Last year, 10% of US retail e-commerce sales flowed through SHOP, second only to Amazon, and the company is still enjoying significant tailwinds as retail merchants of all sizes adopt SHOP’s software tools to display, manage and sell their products across a dozen different sales channels. We believe that the overall growth of e-commerce, combined with the development of new products and services, such as its digital wallet Shop Pay and its pick, pack and ship Shopify Fulfillment Network, should continue to drive revenue growth of about 20% per year over the next several years, accompanied by re-acceleration of operating margin growth and FCF generation.”

Shopify Inc. (NYSE:SHOP), like Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN), is a cloud computing stock investors are keeping an eye on.

9. Twilio Inc. (NYSE:TWLO)

Number of Hedge Fund Holders: 56

Upside Potential: 1.52%

Analyst Price Target: $64.89

Twilio Inc. (NYSE:TWLO) was spotted in the portfolios of 56 hedge funds in the first quarter, with a total stake value of $2.1 billion.

As of May 10, Oppenheimer’s Ittai Kidron holds an Outperform rating on Twilio Inc. (NYSE:TWLO) shares, alongside a $75 price target.

Operating as an internet services and infrastructure company, Twilio Inc. (NYSE:TWLO) is based in San Francisco, California. The company offers software and communications solutions internationally, and it is a leading provider of cloud-based communications infrastructure, which is in high demand.

Aristotle Atlantic Partners, LLC mentioned Twilio Inc. (NYSE:TWLO) in its fourth-quarter 2022 investor letter:

“We sold Twilio Inc. (NYSE:TWLO) and thereby reduced our subsector weight in software. The company reported a decent third quarter, but disappointed on fourth quarter 2022, full year 2023, and long-term guidance. The company is seeing macroeconomic headwinds and a slowdown spreading from technology, social media and cryptocurrency to retail and e-commerce. The other negative disclosure and a driver of this gross margin “miss” was that Twilio’s software sales are not accelerating at the rate that we expected. We are disappointed with this lower topline and low operating margin improvement guidance. The business transformation is taking longer than expected, and there is the heightened possibility that the new software growth could be stifled by more formidable competition as Twilio has made too many missteps.”

Like Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN), Twilio Inc. (NYSE:TWLO) is a promising cloud computing stock to watch today.

8. Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders: 289

Upside Potential: 2.65%

Analyst Price Target: $347.94

Microsoft Corporation (NASDAQ:MSFT) is a systems software company based in Redmond, Washington. It is also a leading global provider of cloud computing services for businesses since it has been making significant investments in cloud and artificial intelligence.

Holding 39.2 million shares in the company, Bill & Melinda Gates Foundation Trust was the largest shareholder in Microsoft Corporation (NASDAQ:MSFT) at the end of the first quarter.

We saw Microsoft Corporation (NASDAQ:MSFT) in the 13F holdings of 289 hedge funds at the end of the first quarter, with a total stake value of $57.9 billion.

Daniel Ives at Wedbush holds an Outperform rating on Microsoft Corporation (NASDAQ:MSFT) shares as of July 5. The analyst also holds a $375 price target on the shares.

L1 Capital made the following comment about Microsoft Corporation (NASDAQ:MSFT) in its first-quarter 2023 investor letter:

“We commented in the December 2022 Quarterly Report “sentiment towards many high-quality technology and ecommerce related businesses like Amazon and Alphabet is negative. Capital flows and an over-emphasis on short-term challenges is driving share prices well below fair value, providing compelling investment opportunities for longer term investors”. In that report we outlined in detail why Amazon’s share price has been oversold and offered compelling value.

During the March 2023 quarter the share price of many large capitalisation technology companies increased significantly. The Fund has investments in Alphabet, Amazon and Microsoft Corporation (NASDAQ:MSFT) and their share prices increased 17%, 23% and 20% (in U.S. dollars), respectively. While we continue to see value in these privileged, high-quality businesses, share prices are no longer trading at materially oversold levels and we have selectively started to trim some of the Fund’s exposure. Microsoft was trimmed due to share price performance and position size.”

7. Alphabet Inc. (NASDAQ:GOOGL)

Number of Hedge Fund Holders: 204

Upside Potential: 8.59%

Analyst Price Target: $132.64

BofA Securities analyst Justin Post reiterated a Buy rating on Alphabet Inc. (NASDAQ:GOOGL) shares on July 5. The analyst also maintains a $128 price target on the stock.

Alphabet Inc. (NASDAQ:GOOGL) is a big tech company playing a major role in the cloud computing industry with Google Cloud, which is a suite of cloud computing services. Google Cloud runs on the infrastructure Alphabet Inc. (NASDAQ:GOOGL) uses internally for its consumer products, like Google Search and Gmail.

A total of 204 hedge funds were long Alphabet Inc. (NASDAQ:GOOGL) in the first quarter. Their total stake value in the company was $17.7 billion.

ClearBridge Investments said the following about Alphabet Inc. (NASDAQ:GOOGL) in its first-quarter 2023 investor letter:

“While Alphabet Inc. (NASDAQ:GOOG) was another positive contributor in the quarter, we trimmed the position given the launch of Microsoft’s new generative AI product (“Bing AI”) which is targeted directly at Alphabet’s core search business. While we believe Alphabet’s business model is likely to remain resilient given the breadth of its user data as well as its internal innovations around AI, we continue to monitor the area closely given the rapid adoption of ChatGPT and other generative AI products.”

6. Amazon.com, Inc. (NASDAQ:AMZN)

Number of Hedge Fund Holders: 243

Upside Potential: 8.68%

Analyst Price Target: $141.09

Amazon.com, Inc. (NASDAQ:AMZN) plays its part in the cloud computing industry with Amazon Web Services, its cloud business.

On July 3, Sachin Mittal at DBS Bank initiated coverage of Amazon.com, Inc. (NASDAQ:AMZN) shares with a Buy rating and a $150 price target.

Amazon.com, Inc. (NASDAQ:AMZN) was found in the 13F holdings of 243 hedge funds in the first quarter, with a total stake value of $25.8 billion.

L1 Capital mentioned Amazon.com, Inc. (NASDAQ:AMZN) in its first-quarter 2023 investor letter:

“We commented in the December 2022 Quarterly Report “sentiment towards many high-quality technology and ecommerce related businesses like Amazon and Alphabet is negative. Capital flows and an over-emphasis on short-term challenges is driving share prices well below fair value, providing compelling investment opportunities for longer term investors”. In that report we outlined in detail why Amazon’s share price has been oversold and offered compelling value.

During the March 2023 quarter the share price of many large capitalisation technology companies increased significantly. The Fund has investments in Alphabet, Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft and their share prices increased 17%, 23% and 20% (in U.S. dollars), respectively. While we continue to see value in these privileged, high-quality businesses, share prices are no longer trading at materially oversold levels and we have selectively started to trim some of the Fund’s exposure.”

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