Amid the recent sell-off, many cloud stocks have borne the brunt of the selling. However, others have held up amazingly well as the industry spawns new tech companies and revives older tech giants.
Thankfully, some of these established players offer potential opportunities amid the selling. Cloud stocks, such as Alphabet (GOOGL 2.84%) (GOOG 2.96%), International Business Machines (IBM 0.53%), and Microsoft (MSFT 2.26%) could profit investors as they navigate a considerable sell-off in sector stocks.
Admittedly, the Google parent has not entirely escaped the sell-off in cloud stocks. Since its high last fall, Alphabet has lost approximately 25% of that value, and most of that loss has occurred since the beginning of April.
Nonetheless, Alphabet remains an online advertising powerhouse, an area that still drives most of its revenue growth. But while it invests in dozens of tech-related businesses, Google Cloud has emerged as its second-largest revenue driver. Grand View Research expects the cloud industry to grow to $1.55 trillion by 2030, a compound annual growth rate (CAGR) of 16%. This strongly indicates that Google Cloud’s influence will likely grow.
For the first quarter, the company reported more than $68 billion in revenue, an increase of about 23%. The bright spot in this report was the performance of Google Cloud, whose revenue surged by 44% to $5.8 billion. Net income fell by over 8% to just under $18 billion due to rising expenses and lower income from investments.
But even with that headwind, its price-to-earnings (P/E) ratio has fallen to a multi-year low of 21. Its earnings multiple remains significantly below that of cloud peers Amazon and Microsoft and appears low considering its earnings growth.
Additionally, the benefit of holding about $134 billion in liquidity should give the company control over its destiny as it expands its presence in the cloud.
IBM stock stagnated for most of the past decade, but a cloud focus could bring back investors. Arvind Krishna, IBM’s former head of the cloud and cognitive software division, became CEO in 2020 after driving the purchase of Red Hat in 2019. Since that time, he has made several smaller, cloud-related acquisitions and spun off the managed infrastructure business into Kyndryl.
However, the Red Hat purchase added focus to IBM’s cloud strategy, making it a leader in the hybrid cloud. Hybrid clouds help public and private clouds act seamlessly, addressing a key challenge with cloud technology. This strategy has made it the fifth-largest cloud provider, according to Synergy Research Group, taking it ahead of Oracle and Salesforce.
Now, the company that struggled to drive positive revenue growth for years reported revenue of over $14 billion in Q1. This rose 8% overall from year-ago levels. Of that, $5 billion came from the hybrid cloud, an area that increased revenue by 14% year over year.
Its stock performance has also remained steadier, with a drop of about 10% from its 52-week high. Its valuation likely helped as the company sells for about 21 times its earnings.
Additionally, IBM pays a dividend of $6.60 per share, a cash return of about 5.1%. With the S&P 500 dividend yield averaging about 1.6%, this could make IBM the cloud stock of choice for many income investors.
IBM may be following in the footsteps of Microsoft, which leveraged the cloud to bring about a comeback in the software giant. Much like Krishna at IBM, CEO Satya Nadella served as executive vice president of Microsoft’s cloud division before taking the CEO job in 2014.
Nadella leveraged this cloud knowledge to transform Microsoft into a cloud company. Under his leadership, Azure has mounted a competitive challenge to Amazon’s AWS, making it the second-largest provider as measured by market share. Moreover, many of its other applications, such as its productivity and security software, evolved into cloud products during Nadella’s tenure.
In its fiscal third quarter of 2022, the company drove revenue of over $49 billion, 18% higher than year-ago levels. Each of Microsoft’s three segments grew revenue by double digits, with intelligent cloud reporting the largest increase at 26%. Additionally, while one could argue that a successful Microsoft is good for all investors, the 46% growth in Azure helps make that even more true for those who own it.
Net income of $17 billion grew by 8%. A 20% increase in expenses and a 94% surge in income taxes paid weighed on earnings.
Still, even with a 24% drop from the 52-week high, Microsoft stock has outperformed the S&P 500 over the past year. Hence, many could see its 27 P/E ratio as reasonable considering its revenue growth. Finally, with its $105 billion in liquidity, Microsoft has positioned itself to continue its investments in this lucrative growth segment.