Stocks to buy

While the pandemic meant a setback for a number of sectors, digitalization grew apace — increasing the need for software and cloud services. In turn, the demand for cloud computing industry should grow further as more businesses adapt to work-from-home. And thus, software and cloud stocks should be hot options for investors.

Overall, shares of many software and cloud companies have seen significant returns in the past year. For instance, so far in 2021, the Dow Jones US Software Index is up 27% and hit an all-time high in recent days. And the ISE Cloud Computing Index has returned 10% year-to-date (YTD).

Additionally, according to research group Gartner, “Worldwide end-user spending on public cloud services is forecast to grow 23.1% in 2021 to total $332.3 billion, up from $270 billion in 2020.” The same study forecasts the sector to reach $397.5 billion in 2022. Therefore, in this article, I will introduce seven leading software and cloud stocks to buy in the coming months.

Even before the pandemic-forced digitalization, we were already benefitting from the fourth industrial revolution, or Industry 4.0 or 4IR, defined as “the current trend of automation and data exchange in manufacturing technologies, including cyber-physical systems, the Internet of things, cloud computing and cognitive computing and creating the smart factory.”

Now, as we move on to Industry 5.0, the focus will shift to collaboration and interaction between humans and machines. With that information, the following seven software and cloud stocks deserve your  attention in the coming weeks:

  • Adobe (NASDAQ:ADBE)
  • Cerence (NASDAQ:CRNC)
  • Dropbox (NASDAQ:DBX)
  • Global X Cloud Computing ETF (NASDAQ:CLOU)
  • Palantir Technologies (NYSE:PLTR)
  • Shopify (NYSE:SHOP)
  • SPDR S&P Software & Services ETF (NYSEARCA:XSW)

Now, let’s dive in and take a closer look at each one.

Cloud Stocks to Buy: Adobe (ADBE)

Source: r.classen / Shutterstock.com

52-Week Range: $420.78 – $642.55

Let’s start with a global diversified software company, Adobe. The San Jose, California-based group offers digital marketing and advertising software and services to students, creative artists, small businesses, government agencies, as well as many of the largest global brands worldwide. Founded in 1982, Adobe has more than 23,000 employees worldwide today.

According to the second quarter financial results announced in mid-June, revenue grew 23% year-over-year (YOY) to $3.84 billion. Non-GAAP net income came in at $1.46 billion, up 22.7% YOY. Diluted earnings per share (EPS) was $3.03 on a non-GAAP basis, an increase of 23.7%. Cash flows from operations were a record $1.99 billion, up 67.9% compared to the previous-year quarter. Adobe ended the quarter with $4.25 billion in cash and equivalents.

On the results, CEO Shantanu Narayen cited, “Our innovative product roadmap and unparalleled leadership in creativity, digital documents and customer experience management position us for continued success in 2021 and beyond.” He added that “the large market opportunity and momentum we are seeing across our creative, document and customer experience management businesses position us well to deliver another record year.”

Adobe has returned over 27.5% YTD, and hit a record high in recent days. The shares trade at 44.44 times consensus forward earnings and 21.04 times current sales. Despite the recent run-up in price, the software giant still offers growth potential and hence potentially high investment returns. Investors should keep the stock on radar to buy the dips.

Cerence (CRNC)

Source: Blackboard / Shutterstock

52-Week Range: $45.86 – $139

Burlington, Massachusetts-based Cerence is an artificial intelligence (AI)-powered assistant provider for connected and autonomous vehicles (CAVs). Its services also include software platforms for building automotive virtual assistants.

Cerence reported strong third quarter financial results on Aug. 9. Revenue of $96.8 million implied a growth of 28.7% YOY. Non-GAAP net income was $26.1 million, increased 110% compared to prior-year quarter. Non-GAAP diluted EPS stood at 62 cents, up 93.75% YOY. Free cash flow ended the quarter at $21.2 million compared to $13.4 million a year ago.

CEO Sanjay Dhawan commented, “Enhancing our future growth opportunities are the strategic collaborations we announced in the quarter with Sirius XM, Visteon and Harman. In the case of Visteon, the collaboration extends into the two-wheeler market, a new adjacent market in which we are making steady progress.”

According to Statista metrics, autonomous vehicles should comprise 12% of car registrations by 2030. Thus, Cerence has the potential to be a winner in the secular growth in CAVs market.

In early June, Japan-based Pioneer announced a strategic partnership with CRNC to develop scalable AI-powered products and services that enhance mobility experiences for drivers and passengers globally.

CRNC stock is up more than 8% YTD. The company’s forward price-earnings (P/E) and price-sales (P/S) ratios are 39.22 and 11.39, respectively. Given the potential for secular growth, interested investors should keep the shares on their radar screen with a view to buy for long-term portfolios.

Cloud Stocks to Buy: Dropbox (DBX)

Source: Allmy / Shutterstock.com

52-Week Range: $17.66 – $33

San Francisco, California-based Dropbox provides online file storage and sharing services. The company was founded in 2007 and currently operates in 180 countries. It also has more than 700 million registered users.

Dropbox released Q2 financial results on Aug. 5. Total revenue came in at $530.6 million, up 13.5% from the same period previous year. Non-GAAP net income was $160.5 million, an increase of 72.2%. Non-GAAP diluted EPS was 40 cents, up 81.8% YOY. Cash and short-term investments ended the quarter at $1.944 billion. Free cash flow was $216 million compared to $119.8 million a year ago.

On the results, CEO Drew Houston remarked, “We’re proud of our execution this quarter as we delivered even more value to our customers and shareholders and are excited about the opportunity ahead to build next-generation tools to support the new world of distributed work.”

Moreover, regular InvestorPlace.com readers might remember that in March, Dropbox acquired DocSend. This is a secure document sharing and analytics company with more than 17,000 customers. The transaction was priced at $165 million.

DBX stock hit as high as $33 after the release of Q3 results. So far this year, the shares have surged around 36%. The company’s consensus forward P/E and P/S ratios stand at 24.94 and 6.16, respectively. Accelerated digital transformation should continue to increase the demand for cloud storage platforms. And given the company’s solid position and growth strategy, investors should consider buying into the declines.

Global X Cloud Computing ETF (CLOU)

Source: Shutterstock

52-Week Range: $21.87 – $30.42

Expense Ratio: 0.68% per year

Let’s continue with Global X Cloud Computing ETF, an exchange-traded fund (ETF) that provides exposure cloud computing companies. These firms include Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) names as well as managed server storage space and data center real estate investment trusts (REITs).

The fund started trading in April 2019 and tracks the Indxx Global Cloud Computing Index. As far as sector allocations are concerned, information technology leads the ETF with 80.7%, followed by consumer discretionary (7.6%), communication services (6.4%) and real estate (5.4%).

U.S.-based companies comprise 86.9% of the fund, which currently has 36 holdings. Other countries represented are Canada (4.8%), New Zealand (3.4%), the U.K. (2.5%), and China (2.4%).

The top ten names make up around 44% of net assets of $1.35 billion. The Schaumburg, Illinois-headquartered cloud-based payroll and human capital management (HCM) solutions provider Paylocity Holding (NASDAQ:PCTY); San Jose, California-based online security platform Zscaler (NASDAQ:ZS) and Oklahoma City-based HCM applications provider Paycom Software (NYSE:PAYC) lead the names in the roster.

CLOU has returned around 28% in the last 52 weeks and 3.3% YTD. Potential investors who seek exposure to cloud names could find value below $28.

Cloud Stocks to Buy: Palantir Technologies (PLTR)

Source: Ascannio / Shutterstock.com

52-Week Range: $8.90 – $45.00

Denver, Colorado-based data-mining and analytics group Palantir Technologies builds and deploys two software platforms. The first one is Palantir Gotham, which focuses on the government intelligence and defense agencies.

Meanwhile, Palantir Foundry is used by leading companies from energy, transportation, financial services, and healthcare sectors. Additionally, it offers Palantir Apollo, the continuous delivery software that powers the SaaS platforms, Foundry and Gotham, in the public cloud.

On Aug. 12, PLTR reported better-than-expected Q2 financial results. Revenue soared 49% YOY to $376 million. Adjusted net income of $98 million implied an increase of almost 644%. Adjusted diluted EPS was 4 cents, up 4 times over the prior-year quarter. Cash flow from operations came in at $23 million and adjusted free cash flow stood at $50 million.

On the earnings call Chief Operating Officer Shyam Sankar said, “Cutting-edge product and continued efficiencies in distribution drove exceptionally strong year-over-year Q2 results,” and added, “The number of commercial customers grew 32% over last quarter. We closed 62 deals of $1 million or more, 30 of which were for $5 million or more and 21 were for $10 million or more.”

Sankar also introduced the “Meta-Constellation” software that integrates with existing satellites building a more efficient AI-enabled decision chain. Looking forward, the company raised its full-year guidance for adjusted free cash flow to more than $300 million, up from more than $150 million.

Though PLTR shares surged more than 10% after the release of Q2 results, they are currently trading at around $24, shy of the record highs seen in late January. So far this year, PLTR stock is up 2.6% and trades at 163.93 times forward earnings and 36.86 times current sales. Buy-and-hold investors could consider investing around current levels.

Shopify (SHOP)

Source: justplay1412 / Shutterstock.com

52-Week Range: $839.40 – $1650

Canada-based Shopify provides a cloud-based e-commerce platform primarily to small and midsize companies. It offers merchant solutions to over 1.7 million businesses worldwide.

SHOP’s Q2 financial results issued in late-July showed a YOY growth of 57% in the total revenue, which came in at $1.12 billion. Adjusted net income was $284.6 million, or $2.24 per diluted share. Those metrics showed an increase of 120% YOY and 113% YOY, respectively. Cash and marketable securities stood at $7.76 billion compared with $6.39 billion on Dec. 31, 2020.

At a recent Shopify Unite developer conference, CEO Tobi Lütke pointed out, “What used to be two completely distinct industries, the retail industry and the online commerce industry, are now just the commerce industry… Shopify is building the essential infrastructure for this increasingly digital world to allow as many people as possible to participate.”

Shopify has proven to be a winner in recent years, and management still invests for growth despite the deceleration in pandemic-fueled gains. SHOP stock trades at 232.56 times forward earnings and 48.47 times current sales. So far this year, the shares have returned 29.5%. Given the overstretched valuation levels, potential investors could consider investing towards $1400.

Cloud Stocks to Buy: SPDR S&P Software & Services ETF (XSW)

Source: Shutterstock

52-Week Range: $113.56 – $177.74

Expense Ratio: 0.35% per year

The final choice of software and cloud stocks is the SPDR S&P Software & Services ETF which tracks the S&P Software & Services Select Industry Index. The fund provides exposure to a range of U.S.-based software businesses.

The fund’s market value has reached more than $560 million since its inception in late September 2011. XSW currently has 184 equal-weighted stocks. The sub-sectors are application software (55.42%), data processing & outsourced services (19.05%), systems software (16.7%), IT consulting & other services (5.35%) and interactive home entertainment (3.2%).

The top ten holdings weigh almost 6% of total net assets. Leading stocks include the work management platform provider Asana (NYSE:ASAN), Paycom Softwareand Paylocity.

XSW has returned nearly 9% YTD and 40% in the last 12 months. Given the low expense ratio and the diversified exposure of the fund, investors could consider investing below $165.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

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