In many ways, 2021 has seen a reversal of many of the trends which dominated 2020. This is certainly true for cloud computing stocks, which have seen a big correction in the last few weeks. For instance, the Wisdom Tree Cloud Computing Fund (WCLD) is down 22% since mid-February. 

There are a few reasons for this weakness: 

1. Interest rates are rising due to expectations of strong economic growth in the second half of the year as the economy reopens. This tends to put pressure on high-multiple stocks. The price to sales (PS) ratio for the cloud sector is 6.2, while it’s around 1.5 for the S&P 500. 
2. Many of these stocks experienced huge surges in growth in 2020 due to the coronavirus as companies were forced to increase spending on cloud computing. Thus, many companies are now facing elevated year-over-year comps. Of course, many growth investors will tend to dump high-multiple stocks at the first sign of any deceleration in revenue.
3. Improving economic conditions has led to a rotation into sectors that will benefit from these conditions such as financials, energy, and materials, while the sectors that won’t be affected have experienced selling pressure.

Time to Buy?

During this recent correction, most cloud stocks have experienced a significant pullback. Yet, the one exception is cloud storage stocks. The same factors that are negatives for the overall sector are positives for this group.

Cloud storage stocks are more connected to small business spending which is likely to be quite strong in 2021 and 2022 as the economy returns to baseline levels. Further, they have much lower valuations than their peers, so they are likely to benefit from continued strength in value stocks.

Three of the top cloud storage stocks that investors should consider buying are Dropbox (DBX), Box (BOX), and Dell Technologies (DELL).

Dropbox (DBX)

DBX provides cloud storage solutions and file-sharing services to more than 600 million registered users across 180 countries. Its ancillary features include Dropbox paper, Dropbox showcase, and Dropbox smart sync, which allow users to create, access, organize, share, collaborate, and secure content.

The company has been long rumored as an acquisition target for enterprise software or cloud company was given the obvious synergies and DBX’s attractive valuation. DBX has a forward PE of 18 which is well below the average for tech companies and the broader market. It’s also expected to grow revenues next year by 13% and users by 9%. 

DBX’s revenues have increased at a CAGR of 21.3% over the past three years, and its margins have improved as well. DBX’s strong fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

The stock has an overall rating of B, which equates to Buy in our proprietary rating system. DBX has a grade of A for Growth and a B for Momentum and Quality. In the 81-stock Technology – Services Industry, it is ranked #9.

In total, we rate DBX on eight different levels. Beyond what we stated above, we also have given DBX grades for Stability, Industry, and Sentiment. Get all DBX’s ratings here.

Box (BOX)

BOX has been a strong performer over the past year as the pandemic led to a surge in demand for the company’s products. Unlike most cloud stocks, BOX’s earnings and revenue growth outpaced its gains.

Thus, the stock remains attractive on a valuation basis with a forward PE of 23 which is significantly below its peers in the sector and in-line with the market average. Further, the company expects 11% revenue growth and 26% earnings growth next year. 

Many investors are also excited by its recent acquisition of the electronic signature company, SignRequest. This allows the company to authenticate and verify business and enterprise plans which will increase security and governance for various contracts. In essence, companies will be able to do more on Box’s platform without having to leave it, and BOX will get another revenue stream.

BOX has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance. 

It has an A grade for Value and a B for Growth, Momentum, and Quality. This is justified given the stock’s relative undervaluation and surging profitability. BOX is currently ranked #3 of 81 stocks in the Technology – Services industry. Click here to view additional BOX ratings for Stability and Sentiment.

There are 23 other stocks in the Technology-Services industry with an overall rating of A or B. Click here to see them.

Dell Technologies (DELL) 

DELL develops, manufactures, and markets computers and related hardware. The stock is up 16% YTD, while the Nasdaq is flat over the same period. 

One factor behind DELL’s outperformance is that it is selling equipment to companies to help them prepare for the 5G shift. The company has also evolved from mainly consumer-facing to increasingly enterprise-focused which brings higher margins and pricing power.

The stock is quite cheap with a forward PE of 10.3 which is more than 50% below the S&P 500’s forward PE of 23. It’s also attractive on a price to sales basis at 0.7. Over the last 12 months, DELL earned $4.23 in EPS, and analysts expect it to earn $8.32 over the next 12 months. 

DELL is rated an A by the POWR Ratings which equates to a Strong Buy in our proprietary ratings system. It has a grade of A for Growth. In the 52-stock Technology – Hardware industry, it is ranked #3. A-rated stocks have generated an annual compound performance of 30.7% which compares favorably to the S&P 500’s 7.3%.

In total, we rate DELL on eight different levels. Beyond what we stated above we also have given DELL grades for Momentum, Stability, Sentiment, Quality, and Value. Get all the DELL ratings here.

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