Best Cloud-Computing Stocks to Buy in 2016

By Stocks Fool.com

Cloud computing is looking like a massive opportunity for investors over the years ahead. According to estimates from Gartner, the shift toward the cloud will affect over $1 trillion in IT spending by 2020. For investors looking to capitalize on this powerful trend, salesforce.com (NYSE: CRM) and Amazon.com (NASDAQ: AMZN) are among the best cloud-computing stocks in the market right now.

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Image source: Getty Images.

 

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A pure play in cloud computing

 

Salesforce.com is at the same time one of the main driving forces behind the cloud-computing revolution and a top beneficiary from it. The company is an industry pioneer in cloud computing and software as a service, and it has built a diversified portfolio of services around its market leadership in customer relationship management, or CRM.

Salesforce has produced impressive revenue growth over the past several years, and financial reports for the quarter ended on July 31 confirm that the business keeps firing on all cylinders. Total revenue during the quarter came in at $2.04 billion, marking the first $2 billion quarter for the company in its history, and growing 25% year over year. In constant currency terms, Salesforce.com's revenue increased 26%.

Salesforce total quarterly revenue from Q2 2015 to Q2 2017. Image source: Salesforce.com

The company reports performance for four different segments: Sales cloud generates 40% of revenue, service cloud is 30% of company-level revenue, app cloud brings in 19% of revenue, and marketing cloud accounts for 11%. Fortunately for investors in Salesforce.com, the four growth engines are running at full speed, which speaks well about the company's ability to sustain performance going forward. Revenue in the sales cloud segment grew 13% last quarter, service cloud sales increased 29%, app cloud revenue jumped 43%, and marketing cloud revenue grew 28%

Future demand is also looking quite strong. Salesforce.com ended the quarter with $3.8 billion in deferred revenue, up 26% in U.S. dollars and growing 27% in constant currency. Unbilled deferred revenue stands at $8 billion, an increase of 29% year over year.

According to a recent research report from Morgan Stanley, Salesforce.com could benefit from a potential market opportunity worth nearly $165 billion through fiscal 2019. Chances are that revenue growth will slow down as the company gains size over time, but Salesforce.com is still one of the strongest and most direct plays for investors in the cloud-computing industry.

 

The global leader in cloud-computing infrastructure

 

Amazon.com is popularly known for being the undisputed king online retail, but the company is also the top dog in cloud-computing infrastructure on a global scale, a business which is producing impressive growth and expanding profitability for investors in Amazon.com.

Gartner's "Magic Quadrant for Cloud Infrastructure as a Service" is one of the most respected and widely followed publications in the sector, and Amazon has been considered the market leader in the industry by this publication over the past six consecutive years. This is important because market leadership is a key strategic advantage in the business, as it generates brand recognition and expanding financial resources to invest in technology, thus creating a self-sustaining cycle of consolidating market leadership and sustained growth.

Amazon's cloud computing segment, Amazon Web Services, produced $11.1 billion in revenue during the 12-month period ended in September 2016. This represents a modest 8.7% of the company's total revenue during the period. However, Amazon Web Services is significantly outgrowing the rest of the company's segments, and chances are that it will account for an increasing share of overall revenue and profits going forward.

Revenue from Amazon Web Services amounted to $3.23 billion in the third quarter of 2016, growing by a jaw-dropping 55% year over year. By comparison, online retail revenue in North America and in the international segment grew 26% and 28%, respectively.

Amazon Web Services sales and operating income from Q3 2015 to Q3 2016. Image source: Amazon.com.

Even better, Amazon operates with razor-thin profit margins in online retail, while cloud computing generates far better profitability. Amazon Web Services generated $861 million in operating profit last quarter, growing by 101% year over year and representing an operating profit margin of 27%.

The lion's share of Amazon's sales and cash flows will probably keep coming from online retail in the foreseeable future. However, when considering both revenue growth and profit margins in Amazon Web Services, the cloud-computing business is clearly looking like a powerful return driver for investors in Amazon stock going forward.

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Andrs Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.