Cloud computing is an industry that has come of age. It is a useful sector that has led to more efficient corporations and one that makes it safe for them. It has also changed how we access information and digital services.
In a society more and more launched in the web 2.0 (but now also towards 3.0) this industry is becoming more and more important, just think of two areas such as cybersecurity and cloud storage. And, as a result, companies offering these services are becoming increasingly important in the global financial landscape. Two names out of all, Alphabet, Amazon and Microsoft.
In this article, we will look at what cloud computing stocks are and how to trade them.
What is cloud computing?
Cloud computing is a type of technology that enables people and companies to save their data in large data centers that are spread out globally. For example, instead of saving your documents and files in your computer, you can save them on a cloud platform. As a result, you can access them at any time no matter where you are.
Similarly, instead of buying a physical DVD copy of a computer game, you can easily access the game through the internet. In other words, the industry has revolutionized how people access information and work.
Still, while cloud computing is good, many companies are now opting for a hybrid computing ecosystem because of the risks involved. Hybrid computing is a technology where a company saves data in the cloud and then backs it physically.
Types of cloud computing stocks
The cloud computing sector is significantly wide. As a result, there are several types of cloud computing stocks that you can invest or trade in. Here are some of the most common examples.
- Cybersecurity stocks - These are companies that offer their cybersecurity services in the cloud. They don’t sell their physical copies of software. Examples are CrowdStrike and Mandiant.
- Cloud storage - These are companies that provide storage services to individuals and companies. The best known of them are DropBox and Box.
- Hybrid computing - These are companies that offer a combination of cloud and on-premise storage. Examples are IBM and Microsoft.
- SAAS - These are companies that offer their software as a service. Examples are Salesforce and Asana.
- Infrastructure - There are companies that offer the infrastructure needed to provide this type of business. Examples are Microsoft and Amazon.
In general, all these types of cloud computing companies can be divided into three, including:
- Infrastructure-as-a-service (IAAS)
- Software-as-a-service (SAAS)
- Platforms-as-a-service (PAAS)
Best cloud computing stocks
There are many cloud computing stocks to choose from, especially when you are focusing on the American stock market. Some of the most popular of them are:
- Fastly and Cloudflare - These two companies are so important because they ensure that websites run smoothly globally. If one goes out, many websites like Amazon, New York Times and Facebook will not be accessible.
- Amazon and Microsoft - These are the two biggest cloud computing companies in the world. Indeed, they help to power most services that you use every day like Facebook, Twitter, and Instagram.
- Alphabet and IBM - The two companies are equally important because of their significant market share in the industry.
- Salesforce - Salesforce is a leading company that revolutionized how customer relations are done. Today, it also owns some of other companies like Slack and Tableau.
- Crowdstrike - The company offers cybersecurity services to some of the leading companies globally.
Examples of other cloud stocks are Asana, DocuSign, Confluent, and Snowflake among others.
How to trade or invest in cloud stocks
There are two main ways in which you can trade or invest in cloud stocks. First, you can decide to focus on them individually. This is where you focus on trading individual names in the industry lik Salesforce and Digital Ocean among others.
As an investment strategy, this one is usually riskier because of the huge swings that happen. For example, as you can see below, the Docusign stock price crashed by over 20% in a single session.
The other alternative is to focus on cloud computing ETFs. An ETF is made up of tens or hundreds of companies.
There are two types of ETFs. First, there is an active ETF, which is managed by a team of money managers. Second, there is a passive ETF that tracks an existing index.
Examples of the leading cloud computing ETFs are Global X Cloud Computing ETF, Fidelity Cloud Computing ETF, and Wisdom Cloud Computing Fund.
Key data to watch in cloud stocks
Investors and traders focusing on cloud computing pay a close attention to several key numbers. Examples of them are:
- Revenue growth - This is probably the most important data because most of these firms are in a growth phase. Ideally, most investors love companies that are growing at double-digits.
- EBITDA growth - A good number of cloud companies are yet to break even. Therefore, many people watch their EBITDA growth instead.
- Margin expansion - Another gauge that is watched closely is known as margin expansion. This one refers to the difference between sales and profits. Ideally, you want a company that is growing its gross and profit margin.
- ARPU - This metric measures the Average Revenue Per User. It measures what every user of the company is paying.
- Regional data - Ideally, most investors love cloud companies that are winning new customers internationally.
Strategies to trade and invest in cloud stocks
Investing and trading could stocks is similar to how you trade other types of companies. The only difference is that most companies in the industry are not cheap in terms of valuations. Indeed, it is not difficult to find a company trading at 100x multiple.
One way which people use to value growth companies is known as the Rule of 40. It is a valuation method in which you look at the company’s margins and growth. If the total is bigger than 40, it means that the company is fairly valued. For example, assume that a company has an operating margin of -15% and it is growing at 60% year-on-year. In this case, its rule of 40 is 45%.
Another way of trading cloud stocks is to use arbitrage since some of them move in the same direction. For example, companies like Cloudflare and Fastly that offer a similar product tends to move in the same direction. As such, you can use arbitrage to take advantage of the spread.
Cloud computing is an industry that is showing significant growth globally. It is actually changing the world in most cases.
It is no coincidence that many of the companies we mentioned in our article are among the most highly rated and popular among traders. Not only by investors, but also by intraday traders, because there is enough volatility in this sector.
In this article, we have looked at some of the top strategies to use when trading these companies and identified some of them.
External useful resources
- Cloud stocks are off to a brutal start to 2022 as investors sour on pandemic’s top performers - CNBC