In the last decade, cloud stocks have been some of the top-performers on the market. These stocks have also been especially strong during the coronavirus pandemic.  

Cloud computing remains a promising sector in 2021 for investors given the massive transition of enterprise IT spending in the public cloud. It offers companies the opportunity to save costs as they do not have to manage their own infrastructure anymore. 

According to market research company Gartner, global annual spending on public cloud is expected to grow from $250 billion in 2020 to $360 billion in 2022.

Here we look at three cloud computing companies that are well poised to outperform in 2021.

Datadog (DDOG) is a fast-growing software platform

The first stock on the list is Datadog (DDOG), a company that monitors enterprise cloud activity and mines it for business insights. Datadog provides a monitoring and analytics platform for developers, technology teams, and business users.

Its SaaS (software-as-a-service) platform integrates and automates multiple processes such as infrastructure monitoring, log management, and application performance monitoring that provides real-term data of the company’s technology stack.

The Datadog platform also provides network performance monitoring and products that include dashboards, advanced analytics, and collaboration tools.

In the most recent quarter, Datadog sales were up 68% year-over-year while it expects full-year revenue to increase 57% based on the company’s midpoint forecast. As the company continues to scale, Datadog is also able to improve profit margins.

In the last fiscal year, Datadog reported an operating loss of $5.4 million while the company forecast to report operating income between $28 million and $34 million in 2020. In the June quarter, the number of customers that generate annual recurring revenue of over $100,000 grew 71% year-over-year.

Its customer base grew 37% as well in Q2, while its dollar-based net retention rate stood at 130%, which means customers are spending an additional 30% on the Datadog platform compared to the prior-year period.

Datadog stock is trading at $102 and has gained 180% since it went public last September. The company has a market cap of $31 billion, indicating a forward price to sales multiple of 54x and a price to earnings multiple of 851x. The stock is trading at a lofty valuation but it’s supported by robust earnings and revenue growth.

Splunk (SPLK) stock has returned 500% since IPO

Splunk (SPLK) develops software solutions that are used by enterprises to gain real-time operational intelligence. The company offers a variety of cloud-based products and services to enterprises.

Splunk Enterprise is a data platform that includes indexing, search, reporting, analysis, monitoring, and data management capabilities. Splunk Cloud is a cloud service for machine data while Splunk Enterprise Security addresses security threats and event management use cases.

SignalFx provides real-time troubleshooting for cloud infrastructure applications and Splunk IT Service Intelligence monitors key performance indicators of critical IT services. Further, Splunk also provides the Splunk App for Amazon Web Services that collects and analyzes data from AWS data sources.

Last year, Splunk shifted towards a SaaS-based business model which resulted in a change in revenue recognition methods. This means its revenue is now recognized over the period of the enterprise subscription contract compared to its old model where revenue was recognized upfront at the time of sale.

This meant Splunk sales were down 2% year-over-year in the first six months of fiscal 2021 at $926 million. However, if we consider the company’s annual recurring revenue (ARR) metrics Splunk’s total sales were up 50% at $1.93 billion at the end of Q2. In the next two years, Splunk forecasts ARR to grow by an annual rate of 40% to reach $4.6 billion by 2023.

Splunk is valued at a market cap of $34 billion which means its price to sales multiple is 14.7x which is significantly lower than Datadog. Splunk stock has already gained 500% since it went public in 2012 and might continue to generate market-beating returns in the upcoming decade as well.

ServiceNow (NOW) stock is up 75% in 2020

ServiceNow (NOW) is the third and final stock on this list. It provides cloud computing solutions that manage and automate repeatable business processes. The company offers information technology service management applications and digital workflow products in customer service, risk management, human resources, and other enterprise verticals.

ServiceNow also provides a suite of IT service management products for enterprise employees, customers, and partners. It ended 2019 with a customer base of 6,200 which includes 80% of the Fortune 500 companies.

It now has 964 customers with an annual contract value of $1 million. ServiceNow has a renewal rate of 97% indicating strong customer retention. This focus on customer acquisition has allowed ServiceNow to expand revenue by 30% in the first half of 2020 while net income was up 69%. For 2020, the cloud giant has forecast subscription sales to rise by about 30%.

ServiceNow is valued at a market cap of $97 billion which means its price to sales multiple is 22x. ServiceNow stock has already gained 2,000% since it went public in 2012 and is up 75% year-to-date.

The final takeaway

We can see that the three companies are trading at high valuations. However, they have experienced stellar growth in revenue and earnings, which should continue in 2021. Growth stocks trade at a premium which means they will outpace the broader market returns in a bull run but also underperform when markets turn bearish.

These companies are part of expanding addressable markets with a subscription-based business model. This allows them to generate a predictable stream of revenue across business cycles and lower massive fluctuations in a downturn.

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DDOG shares were trading at $99.55 per share on Friday morning, up $0.61 (+0.62%). Year-to-date, DDOG has gained 163.50%, versus a 8.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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