One of the highest-growth secular tech trends of the 2020s will be cloud computing. Gartner projects global public cloud revenue will grow 17% in 2020 to $266.4 billion. Software-as-a-service (SaaS) is the largest segment, which Gartman projects will account for $116 billion in spending this year. However, infrastructure-as-a-service (IaaS) is projected to be the fastest growing cloud segment of 2020, expanding 24% to $50 billion in revenue.
From 2018 to 2022, global cloud revenue will grow from $196.7 billion to 354.6 billion, according to estimates. Here are eight cloud stocks to buy to capitalize on that trend, according to Bank of America.
Salesforce.com, inc. (NYSE: CRM)
Salesforce provides cloud-based on-demand customer relationship management services. Analyst Kash Rangan has said Salesforce provides investors with a rare combination of organic revenue growth, margin expansion and acquisition synergies.
Rangan says from 2018 to 2023, the CRM cloud segment is expected to grow 20% annually. He says Salesforce should be a core cloud holding, and Bank of America has it included in its US1 list of top America stocks. While the size of the cloud pie is expanding, Rangan says Salesforce should continue to gain market share in the long-term.
Bank of America has a Buy rating and $215 price target for CRM stock.
Amazon.com, Inc. (NASDAQ: AMZN)
While Amazon’s core e-commerce business is still going strong, its Amazon Web Services cloud segment has been the company’s major growth driver in recent years.
Analyst Justin Post has said Amazon is the earliest in its penetration curve of all the FANG stocks, and AWS and advertising should generate $4.7 billion in incremental profits for Amazon this year. In addition, AWS growth comps start to ease in the second half of the year, and Post says focus will start to shift to cloud margins expansion opportunities.
Bank of America has a Buy rating and $2,330 price target for AMZN stock.
Microsoft Corporation (NASDAQ: MSFT)
Amazon remains the market share leader in public cloud with roughly 39% share, but Microsoft is a distant second with 19% share. However, Microsoft is the market share leader in enterprise IaaS.
Post projects 2020 Azure revenue of $25 billion, up 46% from 2019 levels. In the long-term, Post estimates Azure gross margins could settle in the mid-40% range. After Microsoft beat out Amazon for the $10 billion Department of Defense JEDI cloud contract back in October, Post revised his long-term Azure projections. He now calls for 43% annual Azure revenue growth through fiscal 2023.
Bank of America has a Buy rating and $162 price target for MSFT stock.
Alphabet’s Google Cloud is a distant third in the cloud market share race behind AWS and Azure, but it's certainly putting up some impressive growth numbers.
In the most recent quarter, Post estimates Google’s Infrastructure and Platform Cloud revenue (ex-G Suite) was up 71%, outpacing both Amazon and Microsoft. Post projects Google Cloud (including G Suite) can reach $13.4 billion in 2020 revenue and potentially be valued at around $107 billion. Post says Google Cloud’s recently announced partnership with Sabre is the latest indication of its expansion into the travel business.
Bank of America has a Buy rating and $1,620 price target for GOOGL stock.
Adobe Inc (NASDAQ: ADBE)
In the past several years, Adobe has successfully transitioned its popular photo and film editing tools to the cloud, and its Creative Cloud product is now its biggest seller. Rangan says Adobe’s 31% document cloud growth fueled the company’s earnings beat last quarter. Rangan projects Creative Cloud subscribers could double from around 14.5 million in fiscal 2018 to around 29 million by fiscal 2023. Bank of America estimates Adobe’s 2022 total addressable market is now $128 billion, including $31 billion for Creative Cloud, $13 billion for Document Cloud and $84 billion for Digital Experience.
Bank of America has a Buy rating and $350 price target for ADBE stock.
Twilio Inc (NYSE: TWLO)
Twilio helps developers integrate communication capabilities into software applications.
Analyst Nikolay Beliov recently said Twilio is capable of 40% revenue growth in fiscal 2020. Beliov has said Twilio shares deserve to trade at a valuation premium to its SaaS peers due to its standout revenue growth. He said Twilio is well-positioned to consistently beat analyst expectations and raise its guidance in coming quarter. Once Twilio demonstrates a clear path to $2 billion in revenues, he said there's an opportunity for the stock’s valuation to expand as well. In the longer-term, reaching a free cash flow break-even point could also be a positive catalyst for the stock.
Bank of America has a Buy rating and $138 price target for TWLO stock.
Splunk Inc (NASDAQ: SPLK)
Splunk is a cloud platform for collecting, analyzing and storing machine-generated data. In the most recent quarter, Splunk reported annual recurring cloud revenue growth of 86%. Rangan projects total annual recurring revenue will reach $2 billion in 2020 and $3 billion by fiscal 2023. Rangan also pegs fiscal 2023 for a free cash flow inflection.
Splunk has guided for negative free cash flow of $300 million in fiscal 2020 and 20201, but Rangan projects positive free cash flow of $1 billion in fiscal 2023. He recently said Splunk has disruptive technology and is well-positioned to address the emerging opportunity in Big Data.
Bank of America has a Buy rating and $170 price target for SPLK stock.
Veeva Systems Inc (NYSE: VEEV)
Veeva is a cloud CRM service provider focused on the pharmaceutical industry.
Analyst Brad Sills recently said Vault subscriber growth of greater than 40% and accelerating commercial cloud revenues should help support the stock. Sills said Vault is addressing a potential multi-billion dollar early-stage growth opportunity. Bank of America projects sustainable 20%-plus subscription and billings growth over at least the next five years. At the same time, Sills says the company’s Commercial segment should also grow in the mid-teens, and datacenter scaling should drive margin expansion as well.
Bank of America has a Buy rating and $192 price target for VEEV stock.