2018 was a year to forget for most stocks, as the S&P 500 finished the year in negative territory amid concerns about trade tensions, interest rates, and a slowdown in earnings growth. Yet one trio of high-growth cloud service companies -- Adobe Systems (NASDAQ: ADBE), Twilio (NYSE: TWLO), and Veeva Systems (NYSE: VEEV) -- bucked the downward trend with big gains.
Adobe rallied nearly 30%, Veeva advanced about 60%, and Twilio surged a whopping 260%. Investors might be tempted to take profits after those big gains, but I think these three cloud computing stocks still have plenty of room to run in 2019. After all, the global market for cloud applications services could still grow from $73.6 billion in 2018 to $117.1 billion in 2021, according to Gartner.
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Over the past few years, Adobe transformed its flagship applications -- including Photoshop, Premiere, Illustrator, and Acrobat -- from locally installed apps to cloud-based services. Those "Creative Cloud" services became the core growth engine from its digital media services division.
Adobe also expanded its enterprise services ecosystem with marketing and analytics tools, which were bundled into its digital experience unit. The company recently expanded that platform with its acquisitions of Magento and Marketo. Its gross margin dipped year over year last quarter as it integrated those businesses, but it continues to support its EPS growth with big buybacks.
Simply put, Adobe leverages its dominant position in creative software to tether professionals and enterprise customers to an ever-expanding ecosystem of cloud services. Demand for both types of services is surging, and analysts expect its revenue and non-GAAP earnings to rise 28% and 41%, respectively, this fiscal year, which ends in November 2019. Those are solid growth rates for a stock that trades at 29 times this year's earnings.
Twilio's cloud service handles calls, text messages, videos, and other in-app communications features for mobile apps. Building those features from scratch was once a time-consuming and buggy process, but Twilio simplifies the process with a few lines of code that developers can integrate into their apps.
In other words, developers "outsource" those tasks to Twilio's cloud service so they can focus on the development of their core services. For example, Airbnb lets Twilio handle in-app messages on its platform so its developers can concentrate on its core short-term rental services.
Twilio's first-mover advantage and best-in-breed reputation give it an edge against smaller competitors, such as Vonage's Nexmo and Bandwidth. The bears once claimed that those rivals would derail Twilio's growth -- but its revenue growth is still accelerating, its ecosystem is expanding (both organically and inorganically), and it recently achieved non-GAAP profitability.
Wall Street expects Twilio's revenue and non-GAAP earnings to rise 31% and 46%, respectively, in the next fiscal year, which ends in December 2019. The stock definitely isn't cheap at over 500 times forward earnings and 10 times forward sales -- but its position as a high-growth niche market leader might justify those premium valuations.
Veeva provides a cloud platform for over 600 life-science companies, including pharma giants GlaxoSmithKline and Novartis. Its two core platforms are the Veeva Commercial Cloud, which enables companies to manage relationships with its customer relationship management tools; and the Veeva Vault, which lets companies track industry regulations, clinical trials, and prescribing habits in real time.
Veeva's first-mover advantage enabled it to dominate this niche market, which profits from the escalating competition between major drug companies. It also enjoys close ties to Salesforce (NYSE: CRM), the world's biggest cloud-based CRM services provider. Veeva's co-founder, CEO Peter Gassner, was previously Salesforce's SVP of technology. In addition, Veeva's CRM platform is powered by the Salesforce1 app development platform, and its services are tethered to Salesforce's marketing and service clouds.
Veeva's revenue and non-GAAP earnings are expected to rise 18% and 16%, respectively, in fiscal 2020, which ends in January 2020. The stock looks a bit pricey at about 50 times forward earnings -- but it still has plenty of room for organic growth as it expands its digital ecosystem and inorganic growth through acquisitions. It also remains a lucrative takeover target with consistent GAAP profits, a clean balance sheet, and a reasonable enterprise value of $11 billion.
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