3 Top Cloud Computing Stocks to Buy in July – The Motley Fool

The cloud will be a massive industry by 2030. According to tech researcher Gartner, global spending on cloud computing should grow about 23% this year and exceed $330 billion. And with double-digit percentage expansion in the forecast for the foreseeable future, this could easily be a $1 trillion-a-year chunk of the world economy by the end of the decade.  

Buying and staying invested in stocks with secular growth trends like this yields powerful results. Three top stocks for the cloud revolution this month are Advanced Micro Devices (NASDAQ:AMD), Anaplan (NYSE:PLAN), and Zoom Video Communications (NASDAQ:ZM). Here’s why.

Two researchers designing a computer system in an office.

Image source: Getty Images.

1. AMD: An upstart chip company grows up

After more than a decade of playing catch-up on the technological front, small and scrappy chip designer AMD has come into its own. While it’s still a tiny outfit compared to its top rival Intel, AMD has been going gangbusters and has scooped up all sorts of market share in recent years. It’s also reaching a point where it’s profitable enough to start returning excess cash to shareholders. 

To illustrate the dramatic leaps AMD has taken, consider its first-quarter 2021 financial results. Revenue increased 93% year over year to $3.45 billion, driven by growth in all major product lines. CEO Lisa Hsu reported that the company’s data center-specific sales (the computing units that make the cloud possible in the first place) more than doubled from a year ago. Sure, a global semiconductor shortage helps, but AMD is making hay from this development. Intel, by contrast, reported a 1% decline in revenue during Q1.

AMD is forecasting a slower pace of growth for the balance of 2021. Total sales are expected to increase only 50%, representing a sharp slowdown from the pace set in Q1. Nevertheless, this outlook doesn’t include the pending acquisition of Xilinx, the leader in field-programmable gate arrays — chips used in lots of growing areas including data centers and 5G mobile networks. Besides helping AMD continue on its present trajectory, adding Xilinx will help inject some new tech development into its current lineup of silicon and improve the company’s overall profitability.  

To that end, AMD announced a $4 billion share repurchase program subsequent to its first-quarter update. AMD plans to use cash it generates from its operations to fund the repurchases. There’s no time limit on the plan’s use, which will help reduce the number of shares outstanding over time and boost earnings per share for shareholders. AMD stock currently trades for 63 times trailing-12-month free cash flow, but given its rapid growth rate and the fact that the semiconductor designer is just beginning to return cash to investors, shares look like a long-term value right now.

2. Anaplan: No market crash needed to go shopping here

Let’s talk about how cloud software is helping large businesses make better use of their data to plan for the future. Because massive amounts of information can be stored and accessed from a centralized location, many organizations have more visibility into their operations than ever before thanks to cloud computing. But making sense of all this data is another story entirely. Enter Anaplan.

Anaplan is a developer in a class of software known as enterprise resource planning (ERP). ERP is used by a company to organize information and plan out decision making based on the data it has. It’s a flexible tool that can be used for everything from financial planning to organizing and sourcing supplies. The ERP space is dominated by some well-known names like Microsoft, SAP, and Oracle, but Anaplan has been more than holding its own. It’s been averaging year-over-year growth well north of 20% since going public in 2018.  

The key to Anaplan’s success is that this software vendor helps unlock the power of the cloud and helps individual users and teams arrive at better decisions with AI. In fact, Anaplan thinks that its platform — which helps connect data across an organization’s various systems, is collaborative, and updates in real-time — embodies the “planning” in ERP. Legacy ERP software not purpose-built for the cloud era is often lacking in always-on connectivity and collaboration. But for teams trying to make the most of their resources when planning for the future, Anaplan is quickly becoming a top-of-mind vendor.

Anaplan focuses on large enterprises, and the pandemic caused a slowdown in the number of new deals it’s inking. However, the company is forecasting full-fiscal year sales growth of at least 24% this year. That’s not bad considering the ongoing mayhem Anaplan’s big business customers are contending with. And with total revenue expected to be just $555 million to $560 million this year, this is a small player in the large ERP software realm. After getting clobbered along with other tech stocks this past spring (Anaplan’s stock price is currently down nearly 40% from all-time highs), shares trade for about 16 times trailing-12-month sales. Armed with $328 million in cash and equivalents and no debt, this fast-growing cloud company’s stock is a top buy in July.

3. Zoom Video Communications: The cloud is taking over the communications industry

Because of events in the last year or so, Zoom needs little introduction. COVID-19 thrust video conferencing into the limelight as a must-have service for both businesses and individuals, and Zoom has become a leader on this front. And even as the effects of the pandemic start to ease, this is still very much a growth company. 

Case in point: Zoom upgraded its outlook for the current fiscal year and now expects sales to increase at least 50% from last year. It’s an impressive figure, but even more so considering it compounds on top of the 326% growth rate posted during the start of the pandemic and when global lockdowns turned Zoom into a household name. Businesses are reopening offices and households are vacationing again, but Zoom has clearly found a place as a communications staple anyway.  

Plus, this is also a wildly profitable business. During the first quarter, Zoom generated free cash flow of $454 million — a free cash flow profit margin of 47%. There was also $4.69 billion in cash and equivalents on balance at the end of April and no debt, an enviable war chest this cloud leader can deploy to promote further growth in the decade ahead. For example, Zoom recently announced it was purchasing a real-time translating software start-up in Germany for an undisclosed sum (which likely means a very small amount of cash). There’s plenty of room for Zoom to make bigger and splashier acquisitions, or to spend on other developments for its communications platform.

Zoom stock trades for 28 times current year expected sales and 73 times trailing-12-month free cash flow — an extremely high price tag, to be sure. But it isn’t so expensive when considering the momentum this cloud software company is riding and the massive size of the global telecommunications industry (which is worth over $1.5 trillion a year) it’s still in the early stages of disrupting. Pandemic or not, Zoom still looks like a buy to me right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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