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3 Stocks to Play the Growth in Cloud-Based Services

The concept of cloud computing has been around for over a decade. However, the industry has rapidly evolved since its origins, which can be traced back to the 1963 DARPA initiative (Defense Advanced Research Projects Agency).

Cloud computing, as we know it today, is a delivery medium that can provide services, such as data storage, analytics, networking, software solutions, and more, over the internet. Before the rise of the cloud, companies were held to the old hardware approach, which would require a hefty investment in new computing technologies to achieve scale and the desired outputs.

Cloud computing offers a more streamlined approach, which allows customers to only pay for the services that they need, with the option to upgrade as the client’s needs change. This allows companies to lower their operating costs, streamline their infrastructure and achieve scale when it is needed.

Source: Technavio
Source: Technavio

The COVID pandemic has only accelerated the growth of cloud-based solutions, as society witnessed the rise of the work-from-home phenomenon and the continued demand from consumers for e-commerce capabilities.

According to Fortune Business Insights, the global cloud computing market was valued at $405.65 billion in 2021. The industry is projected to grow to $480.04 billion in 2022 and surge to a massive $1.71 trillion by the end of 2029. This represents an enticing compound annual growth rate (CAGR) of 19.9% for the period between 2022 and 2029.

With the growth of cloud computing still seemingly in the early stages, here are three companies that stand to benefit from the underlying industry growth:

Asure Software, Inc. (NASDAQ: ASUR)

Asure Software is an Austin, Texas-based company that offers cloud-based human capital management solutions across the United States. Serving small and medium-sized businesses across many different industries, Asure’s suite of services gives companies complete control of every aspect of human capital management, from payroll & taxes to HR decision making, employee attendance, and even 401(k) & benefits integrations.

In August 2022, Asure made two big announcements regarding the expansion of its 401(k) and HR services. First, Asure announced an agreement to integrate its FlexTax payroll tax filing engine with PrismHR’s payroll system, which is currently used by over 80,000 organizations. This also gives PrismHR users access to Asure’s Payroll Tax Management Services. In short, the integration with PrismHR vastly expanded Asure’s payroll & tax services business.

Source: Asure Software
Source: Asure Software

In a separate announcement, Asure announced further integration of its payroll systems to directly connect with over 80 401(k) providers. The traditional route for employers to offer and manage sponsored 401(k) plans is extremely work-intensive and has been a major hurdle for smaller businesses to offer employer-sponsored plans to their workers. Asure’s direct integration with 401(k) providers removes that barrier by streamlining retirement plan options for companies that may otherwise not have the resources to offer such benefits. As workers continue to expect greater benefits and retirement planning options, Asure’s integration gives small businesses an edge in being able to compete for top talent.

Turning to fundamental analysis, Asure looks appealing in its current state. The company trades at nearly a 25% discount to its book value, as seen with a price-to-book value of 0.76. In the current economic conditions, cash flow is absolutely king. Luckily, Asure Software is a serious cash flow generator, which can be determined with a price-to-free-cash-flow ratio of 11.07. Furthermore, the company has very minimal debt and continues to hold a cumulative analyst rating of “strong buy.”

Snowflake, Inc. (NYSE: SNOW)

Snowflake offers cloud-based data analytics solutions through its platform. The company’s Data Cloud offering allows customers to consolidate their data into a single source to help streamline business decision-making. The Data Cloud allows companies to collaborate data on a local and global scale. Rather than having several different programs or applications to manage various cloud functions, Snowflake wants to help cut through the clutter to integrate all areas of the cloud into a single platform.

On August 24, 2022, Snowflake released fiscal second-quarter 2023 earnings, which showed impressive growth amid the current economic uncertainty. Product revenue surged 83% y/y to $466 million and achieved non-GAAP product gross margins greater than 75%. In addition, Snowflake added 12 new Global 2000 customers during the fiscal Q2 2023 period. On a guidance basis, Snowflake’s management estimates third-quarter product revenue to come in between $500 million and $505 million, which would represent a year-over-year growth range between 60% and 62%.

Snowflake Logo
Snowflake Logo

The strong quarterly results prompted analysts covering Snowflake to increase their bullishness on the company. Needham analyst, Mike Cios, initiated coverage of Snowflake with a “buy” rating. The strong recovery in customer growth during fiscal Q2 helped alleviate any concerns from fiscal Q1 regarding the potential for a growth slowdown as the economy weakens. In the note, Mr. Cios said “data is the new oil,” which means Snowflake could be on the way to continued growth over the coming years.

On a fundamental analysis basis, Snowflake is very well capitalized. The company has no debt and cash per share of $12.38, giving the data analytics company a very solid current ratio of 3.20. Unfortunately, the company does appear to be trading at a lofty premium when looking at its price-to-sales of 33.90, price-to-free-cash-flow of 170.36, and a forward price-to-earnings ratio of 405.

CrowdStrike Holdings, Inc. (NASDAQ: CRWD)

CrowdStrike is focused on cybersecurity cloud-based solutions. In a world that is increasingly becoming more digitally connected, the need for proper security has become a major point of emphasis. The company offers a wide range of cybersecurity services, which include Zero Trust identity protection, log management, threat intelligence, IT operations management, and more. Like traditional computing, the cloud can be vulnerable to hackers and criminals who seek to steal sensitive information. CrowdStrike’s Cloud Security solutions provide continuous management and breach protection for any cloud in the industry’s one and only Cloud Native Application Protection Platform. The platform is powered by holistic intelligence and end-to-end protection, which gives managers greater visibility and capability to act against digital threats.

Crowdstrike Logo
Crowdstrike Logo

During the second quarter of the fiscal year 2023, CrowdStrike reported total revenue growth of 58% y/y to $535.2 million. The cybersecurity company reported a record net new ARR of $218 million, which represents year-over-year growth of 45%. Ending ARR grew to an impressive $2.14 billion, an increase of 59% y/y. This demonstrated not only CrowdStrike’s ability to retain customers but to also continue to add new clients as well. The company added 1,700 new customers during the quarter.

Looking at the fundamentals, CrowdStrike trades at a considerable premium to several metrics, despite being down over 18% so far in 2022. The company’s cash position is stable, but CrowdStrike does have a long-term debt-to-equity ratio of 0.60, which weighs on its current ratio of 1.80. The company does trade at a 69x multiple when looking at the price-to-free-cash-flow ratio. Price-to-sales is lofty at 21.40 and forward price-to-earnings comes in at a steep 89.49. However, the company is a growth stock and thus relies more on revenue growth than it does on some of the more value-focused metrics. Bottom line, as long as CrowdStrike can continue its dominant growth, investors will likely continue to maintain a long-term bullish stance on the company.


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