In this article, we discuss the 10 cloud software stocks with strong growth potential.
Cloud software companies have registered explosive growth numbers over the past few years as more businesses embrace the convenience and flexibility offered by cloud platforms. According to a report by Gartner, the global spending on cloud services is expected to exceed $332 billion in 2021, an increase of 21% from $270 billion in 2020. The COVID-19 pandemic, which accelerated an enterprise push towards digital, played a key part in this growth.
Sid Nag, the vice president of research at Gartner, has predicted that emerging technologies like containerization, virtualization and edge computing were becoming more mainstream and driving additional cloud spending. Within the cloud computing space, software-as-a-service remains the largest segment and will reach over $122 billion in value in 2021. However, cloud infrastructure-as-a-service and desktop-as-a-service are likely to see higher growth numbers of 38% and 67% respectively.
Some of the cloud stocks that have been attracting the attention of investors in the recent past include Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY), among others discussed in detail below. Cloud computing firms are also likely to feel the impact of the increased spending into artificial intelligence, the Internet of Things, and high speed 5G internet services, all of which will benefit the overall cloud space.
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Our Methodology
With this context in mind, here is our list of the 10 cloud software stocks with strong growth potential. They were picked keeping in mind the year-on-year revenue growth values for the companies.
The hedge fund sentiment around the stocks was gauged using data of 873 hedge funds tracked by Insider Monkey. The list is compiled according to the hedge fund holders in each stock.
The analyst ratings of the companies and their basic business fundamentals are also discussed to provide readers with some more context for their investment decisions.
Why pay attention to hedge fund sentiment while choosing stocks? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Cloud Software Stocks with Strong Growth Potential
10. Cloudflare, Inc. (NYSE: NET)
Number of Hedge Fund Holders: 43
Year-on-Year Revenue Growth: 52.09%
Cloudflare, Inc. (NYSE: NET) is placed tenth on our list of 10 cloud software stocks with strong growth potential. The company owns and runs a cloud platform for network services. It is headquartered in California.
On August 10, investment advisory Argus maintained a Buy rating on Cloudflare, Inc. (NYSE: NET) stock and raised the price target to $140 from $125, underlining that the firm offered a unique set of services critical for enterprise clients.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Cloudflare, Inc. (NYSE: NET) with 57 million shares worth more than $165 million.
Just like Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY), Cloudflare, Inc. (NYSE: NET) is a cloud software stock that is attracting the attention of investors.
In its Q4 2020 investor letter, Alger Mid Cap Focus Fund, an asset management firm, highlighted a few stocks and Cloudflare, Inc. (NYSE: NET) was one of them. Here is what the fund said:
“Cloudflare. Inc. provides a broad range of network services to businesses of all sizes across the world. Cloudflare’s intelligent global network spans more than 200 cities in over 100 countries. It offers network security, performance and reliability to a growing portion of global web traffic. Today. over 15% of global internet requests go through Cloudflare. Cloudflare’s serverless network design allows this global network to be a key component layer as new developments for edge cornputing. 5G and Internet of Things increase the importance of secure. reliable edge networks. Cloudflare stock outperformed in the fourth quarter following the announcement of Cloudflare One, a cloud-bas. network-as-a-service platform designed to replace the traditional enterprise network infrastructure. The Cloudflare One solution merges existing Cloudflare access and security solutions along with new enterprise-specific features into a unified Zero Trust network that can be managed through a single “pane of glass.” or display screen. With the rapid shift to remote work caused by the pandemic, this product increases Cloudflare’s potential for winning business from enterprise customers seeking to adapt to this new business environment.
While Cloudflare One adoption is still early. Cloudflare has already started to demonstrate an improved ability to sell to large customers. When discussing its third quarter results. Cloudflare said that it is continuing to sign up larger enterprise customers. including its first client to generate more than $10 million in annual recurring revenue. Cloudflare has just started to better monetize its more than 100.000 paying customer base. which along with continued product innovation, gives the company strong growth potential.”
9. RingCentral, Inc. (NYSE: RNG)
Number of Hedge Fund Holders: 47
Year-on-Year Revenue Growth: 32.77%
RingCentral, Inc. (NYSE: RNG) is ranked ninth on our list of 10 cloud software stocks with strong growth potential. The firm provides software solutions for businesses and is headquartered in California.
On August 4, investment advisory UBS maintained a Neutral rating on RingCentral, Inc. (NYSE: RNG) stock and raised the price target to $300 from $275, highlighting that the second quarter results of the firm were a step in the right direction.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Tiger Global Management LLC is a leading shareholder in RingCentral, Inc. (NYSE: RNG) with 3.9 million shares worth more than $1.1 billion.
Along with Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY), RingCentral, Inc. (NYSE: RNG) is one of the top cloud software stocks on the market today.
Here is what Baron Opportunity Fund has to say about RingCentral, Inc. (NYSE: RNG) in its Q2 2021 investor letter:
“RingCentral, Inc. has been a three-year portfolio holding and remains a leader in the cloud unified communications-as-a-service (UCaaS) space, which includes voice, video, messaging, and call center services. But after posting its third quarter in a row of accelerating revenue growth in the first quarter, RingCentral’s shares began to sell off on fears around heightened competition with both Microsoft Teams, of which RingCentral is a partner, and with Zoom Communications, a former partner who has launched its own voice communications offering. Shares sold off further during the period with the rotation out of secular growth names into cyclicals. We used the pullback in the shares to add significantly to our position given RingCentral’s best-in-class UCaaS technology, including five 9’s contractual service commitments (fully operational 99.999% of the time) for voice, which is orders of magnitude above its competitors; presence in roughly 40 countries; data governance and security requirements; number portability with all the relevant domestic and international carriers; and positioning as the Gartner Magic Quadrant UCaaS Leader. The UCaaS market is still quite early in its adoption curve, with only about 3% penetration of the roughly 400 million existing business landline seats in operation today. We believe RingCentral is in a solid position to capture meaningful share of this market, with its exclusive partnerships with legacy landline players like Avaya, Atos, and Alcatel, which effectively gives it a “hunting license” for about half of those 400 million legacy seats, leveraging joint go-to-market efforts with each partner. We remain confident that RingCentral is well positioned to achieve at least 30% top-line growth for years to come, along with steadily improving operating margins and free cash flow generation.”
8. Dynatrace, Inc. (NYSE: DT)
Number of Hedge Fund Holders: 50
Year-on-Year Revenue Growth: 30.92%
Dynatrace, Inc. (NYSE: DT) is a Waltham-based company that provides a software intelligence platform for businesses running multiple clouds. It is placed eighth on our list of 10 cloud software stocks with strong growth potential.
On July 29, investment advisory Truist reiterated a Buy rating on Dynatrace, Inc. (NYSE: DT) stock and raised the price target to $72 from $60, highlighting that the firm had beat earnings expectations in the quarterly results and raised guidance numbers.
Out of the hedge funds being tracked by Insider Monkey, California-based investment firm HMI Capital is a leading shareholder in Dynatrace, Inc. (NYSE: DT) with 6.4 million shares worth more than $378 million.
In addition to Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY), Dynatrace, Inc. (NYSE: DT) is one of the industry leaders in the cloud software market.
7. Anaplan, Inc. (NYSE: PLAN)
Number of Hedge Fund Holders: 52
Year-on-Year Revenue Growth: 28.53%
Anaplan, Inc. (NYSE: PLAN) is a California-based company that owns and runs a cloud-based connected planning platform. It is ranked seventh on our list of 10 cloud software stocks with strong growth potential.
On September 1, investment advisory Truist maintained a Buy rating on Anaplan, Inc. (NYSE: PLAN) stock and raised the price target to $80 from $75, appreciating the “solid” second quarter earnings posted by the firm earlier.
At the end of the second quarter of 2021, 52 hedge funds in the database of Insider Monkey held stakes worth $2.1 billion in Anaplan, Inc. (NYSE: PLAN).
Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY) are some of the best cloud software stocks, just like Anaplan, Inc. (NYSE: PLAN).
Here is what Alger has to say about Anaplan, Inc. (NYSE: PLAN) in its Q1 2021 investor letter:
“Anaplan, Inc. was among the top detractors from performance. Anaplan is a leading provider of cloud-based business planning software. Anaplan’s software platform aims to solve the most complex planning needs of large global enterprises across various business lines. Unlike traditional business planning software, which is often rigid, siloed and opaque, Anaplan’s platform is designed to enable broader enterprise participation and better workforce collaboration during the business planning process. Through better planning, large enterprises can more effectively allocate resources to cut costs and generate revenue. Today Anaplan has over 1,600 customers across a variety of end markets and business use cases.
Anaplan shares underperformed in the first quarter as part of a broader sector rotation as high-growth software stocks fell out of favor relative to more cyclically exposed investment opportunities. We believe Anaplan’s focus on growth over near-term profit generation negatively impacts the company’s stock in a rising interest rate environment.
Fundamentally, Anaplan had strong fourth quarter earnings result, with the company seeing an acceleration of billings growth and a strong demand pipeline as companies realize the need for a more flexible digital planning solution.”
6. Oracle Corporation (NYSE: ORCL)
Number of Hedge Fund Holders: 55
Year-on-Year Revenue Growth: 3.61%
Oracle Corporation (NYSE: ORCL) is placed sixth on our list of 10 cloud software stocks with strong growth potential. The company deals in enterprise technology environments and is headquartered in Texas.
On September 2, investment advisory Barclays kept an Equal Weight rating on Oracle Corporation (NYSE: ORCL) stock and raised the price target to $85 from $83. Raimo Lenschow, an analyst at the firm, issued the ratings update.
At the end of the second quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $2.8 billion in Oracle Corporation (NYSE: ORCL), up from 52 in the preceding quarter worth $2.8 billion.
Microsoft Corporation (NASDAQ: MSFT), Salesforce.com, Inc. (NYSE: CRM), and Workday, Inc. (NASDAQ: WDAY) are some of the premier cloud software stocks, along with Oracle Corporation (NYSE: ORCL).
Here is what Ariel Investments has to say about Oracle Corporation (NYSE: ORCL) in its Q1 2021 investor letter:
“A temporary factor might be a downturn in the high-yield bond market driving up LBO financing costs for the decline in 2021 GAAP revenue for Oracle Corporation (ORCL) due to a change in accounting methods. In all these examples, stock prices were driven well-below our calculations of intrinsic value. We invested in each company with good outcomes. Later, we will offer instances when this strategy is not successful.”
5. Okta, Inc. (NASDAQ: OKTA)
Number of Hedge Fund Holders: 57
Year-on-Year Revenue Growth: 44.76%
Okta, Inc. (NASDAQ: OKTA) is ranked fifth on our list of 10 cloud software stocks with strong growth potential. The firm provides identity management platforms for business clients and operates from California.
On September 3, investment advisory Deutsche Bank maintained a Buy rating on Okta, Inc. (NASDAQ: OKTA) stock and raised the price target to $270 from $265, noting that the quarterly results of the firm were unlikely to quash a debate among bears and bulls on the firm.
At the end of the second quarter of 2021, 57 hedge funds in the database of Insider Monkey held stakes worth $2 billion in Okta, Inc. (NASDAQ: OKTA), up from 48 in the preceding quarter worth $1.6 billion.
4. Snowflake Inc. (NYSE: SNOW)
Number of Hedge Fund Holders: 70
Year-on-Year Revenue Growth: 111.39%
Snowflake Inc. (NYSE: SNOW) is a California-based company that owns and runs a cloud platform for business analytics. It is placed fourth on our list of 10 cloud software stocks with strong growth potential.
On August 26, investment advisory Cowen maintained an Outperform rating on Snowflake Inc. (NYSE: SNOW) stock and raised the price target to $335 from $310, noting that the firm was performing well across all geographies.
At the end of the second quarter of 2021, 70 hedge funds in the database of Insider Monkey held stakes worth $12.5 billion in Snowflake Inc. (NYSE: SNOW), down from 71 in the preceding quarter worth $12.9 billion.
Here is what RiverPark Funds has to say about Snowflake Inc. (NYSE: SNOW) in its Q1 2021 investor letter:
“We also established a position in Snowflake during the quarter. Snowflake offers cloud-based data storage and analytics, generally termed “data warehouse-as-a-service.” The data warehousing market—created by the massive, growing amount of user, customer, and account data and the need to search and analyze it—has historically stored its data on physical servers located on-premises. The cloud data platform market—storing data off-premises on cloud servers—is a relatively new $70 billion+ market. Significantly, incremental warehouse data capacity and renewals are expected to be driven by and to the cloud, with more than 75% of databases in the cloud by 2022.
Snowflake requires absolutely no infrastructure management from its users, is fully scalable for each customer, runs on Amazon, Microsoft, or Google cloud platforms, and most critically, Snowflake helps companies analyze their data. The company also has a unique, customer-aligned billing model based on usage. All of which has led to Snowflake being among the leaders of this highly fragmented market, posting 124% revenue growth last year. SNOW’s growth comes from the combination of more customers—which grew 73% last year—and customers buying more services—the company boasts an amazing 150%+ net customer retention. The company’s growing scale has also led to increasing gross margin and operating leverage, up 1,100 basis points and 8,200 basis points, respectively, over the past two years. The company has guided to FCF break-even this year, and with the company’s capital expenditure-light model—Snowflake uses the public cloud for hosting—we expect FCF to grow much faster than revenue growth, which we forecast to grow comfortably more than 50% per year for the next several years. Additionally, we have great confidence in the SNOW management team, which previously had an enormously successful run guiding one of our other core Cloud software holdings ServiceNow.”
3. Workday, Inc. (NASDAQ: WDAY)
Number of Hedge Fund Holders: 72
Year-on-Year Revenue Growth: 16.98%
Workday, Inc. (NASDAQ: WDAY) is a California-based firm that provides enterprise cloud applications. It is ranked third on our list of 10 cloud software stocks with strong growth potential.
On September 2, investment advisory Jefferies maintained a Buy rating on Workday, Inc. (NASDAQ: WDAY) stock and raised the price target to $320 from $300, noting the impact of investments by the firm into the workforce.
At the end of the second quarter of 2021, 72 hedge funds in the database of Insider Monkey held stakes worth $5.18 billion in Workday, Inc. (NASDAQ: WDAY), up from 69 in the previous quarter worth $5.17 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Workday, Inc. (NASDAQ: WDAY) was one of them. Here is what the fund said:
“In addition to the new issue market, we have been tactically adding growth exposure. We took advantage of the selloff in disruptors that comprise a large portion of the portfolio to initiate a position in enterprise software maker Workday.”
2. Salesforce.com, Inc. (NYSE: CRM)
Number of Hedge Fund Holders: 108
Year-on-Year Revenue Growth: 21.46%
Salesforce.com, Inc. (NYSE: CRM) is placed second on our list of 10 cloud software stocks with strong growth potential. The firm provides cloud computing solutions and is headquartered in California.
On August 26, investment advisory RBC Capital assumed coverage of Salesforce.com, Inc. (NYSE: CRM) stock with an Outperform rating and a price target of $310, noting the firm had delivered strong quarterly results with margin upside.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Salesforce.com, Inc. (NYSE: CRM) with 13.4 million shares worth more than $3.2 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Salesforce.com, Inc. (NYSE: CRM) was one of them. Here is what the fund said:
“We added to our software-as-a-service (SaaS) exposure with the initiation of SaaS leader salesforce.com, which develops software for customer relationship management (we added Workday, which enterprise resource planning applications, last quarter). Saleforce.com is well-positioned in the most attractive end markets in software and will benefit from secular drivers such as remote work and the digital transformation. Salesforce.com is a sustainability leader as well, with a commitment to carbon-neutral cloud, toward which it has set a goal of 100% renewable energy for global operations by fiscal year 2022. The company has a strong focus on equality, in terms of equal rights, pay, education and opportunity. As a data company it has been leading on workforce disclosures and seeks to have 50% of its U.S. workforce made up of underrepresented groups by 2024.”
1. Microsoft Corporation (NASDAQ: MSFT)
Number of Hedge Fund Holders: 238
Year-on-Year Revenue Growth: 17.53%
Microsoft Corporation (NASDAQ: MSFT) is ranked first on our list of 10 cloud software stocks with strong growth potential. The firm operates from Washington and provides software services for a host of applications.
On August 20, investment advisory UBS maintained a Buy rating on Microsoft Corporation (NASDAQ: MSFT) stock and raised the price target to $350 from $325. Karl Keirstead, an analyst at the firm issued the ratings update.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Microsoft Corporation (NASDAQ: MSFT) with 24.8 million shares worth more than $6.7 billion.
In its Q1 2021 investor letter, Polen Capital, an investment management firm, highlighted a few stocks and Microsoft Corporation (NASDAQ: MSFT) was one of them. Here is what the fund said:
“We have written extensively about Microsoft in recent commentaries. It was our leading contributor last year and one of our largest weightings within the Portfolio. It continues to experience business momentum through several dominant, essential, and competitively advantaged businesses, like Office 365 and Azure. The markets it competes for are enormous, which gives the company the ability to compound at scale. In the past quarter alone, the company generated over $40 billion in revenue, representing a 17% growth rate. The inherent operating leverage in Microsoft’s business model continues and led to 34% earnings growth this past quarter. Despite the broad rotation we saw in the first quarter and Microsoft’s robust performance in 2020, we think its business fundamentals continue to exhibit strength, and the stock continues to reflect the fundamentals.”
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Disclosure. None. 10 Cloud Software Stocks with Strong Growth Potential is originally published on Insider Monkey.
