If you upload or download cat videos on YouTube, use Google Photos to back up pictures on your phone, or share documents via Dropbox, you are part of a large global market of consumers -- individuals and enterprises -- who routinely use cloud-computing services.
Once viewed with suspicion due to privacy, cost and security concerns, cloud computing -- online networks of remote servers used to store, access, share and process data -- has now become an integral part of everyday life. For investors, companies that dominate the rapidly growing cloud-computing services space represent a reliable store of value.
The industry's future growth potential is widely acknowledged to be robust as nearly three quarters (75%) of global organizations across industries are planning to move their systems to the public cloud, according to a study by HyTrust. Worldwide revenues from public cloud services are projected to more than double from the US$96.5 billion forecast for 2016 to north of US$195 billion in 2020, at a compound annual growth rate of 20.4%, according to the market-intelligence firm International Data Corp. Another report from the IT research firm Gartner Inc. projects the global public cloud-services market will grow from US$175 billion in 2015 to US$204 billion in 2016, up 16.5%.
With the world becoming increasingly cloud-based, pervasiveness of select cloud companies is irrefutable. Their dominance across enterprise IT space, nimble approach to innovation, differentiated high-quality products, expanding customer base and a long growth runway make them good bets for long-term investment, according to Morningstar equity research.
| Salesforce.com Inc. | ||
| Ticker | CRM | |
| Current yield | - | |
| Forward P/E | 61.0 | |
| Price | US$75.10 | |
| Fair value | US$95 | |
| Data as of Sep. 2, 2016 | ||
Salesforce.com (CRM) is the largest pure-play cloud computing company in the world, offering customer relationship-management service to businesses. The firm operates in three clouds -- sales, service, and applications -- each of which generates more than US$1 billion in annual revenue, the bulk of its sales (75%) coming from the Americas.
The cloud-computing pioneer has "established itself as the runaway leader in the pure-play software-as-a-service, or SaaS," says a Morningstar report. "The firm boasts several cloud products that address large enterprise markets, creating substantial switching costs for its customers."
That more than 75% of its customers deploy all three of its cloud services is an indication of the firm's ability to form customer stickiness. "Enterprises will increasingly turn to cloud computing to eliminate costly IT infrastructure and maintenance costs, creating a long runway for growth in each of Salesforce's product verticals," says Morningstar equity analyst Rodney Nelson.
The company's sustainable competitive advantages are built on a combination of "mission-critical applications, the ubiquity of its products in the enterprise, and increasingly valuable data generated by these applications yield substantial customer switching costs," says Nelson, who recently upped the stock's fair value from US$90 to US$95, nearly 20% above its current price.
Nelson projects compound annual revenue growth rate of 12% over the next 10 years, led by service cloud and app cloud, "as users across the enterprise continue to flock to the Salesforce platform" for a range of applications.
| Workday Inc. Class A | ||
| Ticker | WDAY | |
| Current yield | - | |
| Forward P/E | 630.3 | |
| Price | US$88.98 | |
| Fair value | US$90 | |
| Data as of Sep. 2, 2016 | ||
U.S.-based Workday (WDAY) is a software-as-a-service (SaaS) provider that offers enterprise resource-planning (ERP) software for medium and large enterprises. The firm generates more than 80% of revenue from the U.S.
"After scoring an early blockbuster with its human capital-management software, Workday is broadening its portfolio while simultaneously targeting the world's largest enterprises," says a Morningstar report, noting the company "will be a force to be reckoned with as the cloud land grab rages on for the next several years."
In addition to consistently gaining share in the burgeoning cloud-based ERP market, the company has introduced applications for hiring and recruiting, and payroll processing. The firm, notes the report, has also expanded to financial and supply-chain planning and management software, "applications that bear among the strongest switching costs for back-office business software."
With several high-profile firms like Bank of America and HP on its clients list, Workday's revenue is projected to grow 20% annually over the next 10 years, reaching just over US$8 billion in 2026.
"With more than $1 billion in annual recurring revenue, Workday is the second-largest pure-play public SaaS company in the world, behind only Salesforce.com," says Nelson, who recently raised the stock's fair value from US$85 to US$90.
| Microsoft Corp. | ||
| Ticker | MSFT | |
| Current yield | 2.5% | |
| Forward P/E | 18.3 | |
| Price | US$57.67 | |
| Fair value | US$62 | |
| Data as of Sep. 2, 2016 | ||
Microsoft (MSFT) is a global tech giant that provides software, hardware and services. The firm generates 25% of sales from its intelligent cloud segment which includes Azure, Windows Server OS and SQL Serve. Productivity and business processes, and personal computing, represent 28% and 46% of sales respectively.
In its second-quarter earnings report, Microsoft says its annualized cloud computing revenue run rate exceeds US$9.4 billion, a number the firm says it aims to grow to US$20 billion by 2018. In corporate parlance, "run rate" is current financial information that is used to predict future performance.
Under the leadership of CEO Satya Nadella, Microsoft's vision is pivoting from ‘devices and services' and ‘Windows first' company to "a cloud-first, mobile-first company that embraces developers and enterprises," says a Morningstar report.
The firm's public cloud offering Azure, a division that grew 108% year over year, not only provides substantial growth opportunities, but will be able to offset any lost revenue from Windows. "Microsoft has solidified its position as the number-two public cloud vendor with its Azure platform, which should provide substantial growth for several years," says Nelson, who pegs the stock's value at US$62 and forecasts compound annual revenue growth of more than 50% over the next five years.
| Red Hat Inc. | ||
| Ticker | RHT | |
| Current yield | - | |
| Forward P/E | 29.9 | |
| Price | US$73.75 | |
| Fair value | US$80 | |
| Data as of Sep. 2, 2016 | ||
Red Hat (RHT) provides open-source software and services which include the Linux software operating system. The company generates its revenue from two segments: subscriptions and training, and services. The Americas contributed 60% of total 2015 revenue, while Europe, the Middle East, and Africa contributed 25%, and the rest came from Asia-Pacific.
Red Hat, which was recently added to Forbes' list of the world's most innovative companies, has become the face of the open-source cloud-system software movement.
"Red Hat has roughly quadrupled its addressable market (which should eclipse (US)$60 billion by 2018) by driving open-source projects around storage, virtualization, middleware, platform as a service, and infrastructure as a service," says a Morningstar report.
More than a quarter of all servers use paid versions of Linux, of which Red Hat controls roughly a 75% share, creating a reliable recurring revenue stream for Red Hat. Further, Linux OS is projected, by the independent research firm IDC, to power roughly 61% of servers by 2018, up from 47% in 2014.
"As Linux pervades a greater share of existing and new server workloads, Red Hat's presence should be solidified as a go-to provider of services and support for the Linux server OS," says Nelson, who estimates the stock's worth to be US$80, and projected revenue growth in the mid-teens through 2020.
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