According to a Johns Hopkins University study, the number of COVID-19 cases across the globe crossed 41 million. Many cities in the United States and Europe are witnessing another surge in cases worse than the first wave. According to experts, this may just be the beginning with things getting worse in the winter months.
This will have negative effects on economic activity. However, we’ve learned that it will positively impact tech especially as remote working would continue to be the norm. So will online shopping, digital payments, and contactless deliveries. The technology sector has been the least impacted during the COVID-19-induced market crash. The tech rally has been on the biggest forces for the market bouncing back post-March. The Technology Select Sector SPDR (XLK) has advanced 30% since the beginning of 2020 compared to the S&P 500’s 6.3% gain.
Out of the technology stocks, the ones focusing on cloud-based services will be the biggest beneficiaries. I believe the top three stocks that will maintain a strong momentum based on their existing and modified offerings are Microsoft Corporation (MSFT), Adobe, Inc. (ADBE), and Salesforce.com (CRM).
Microsoft Corporation (MSFT)
More than anything else, MSFT is now known for its Azure cloud computing services. MSFT’s Commercial Cloud, a collection of cloud products, now contributes more than one-third of the company’s total revenue.
The tech bellwether constantly focuses on innovation to stay ahead of the game. MSFT keeps expanding the hybrid capabilities of its cloud platform to enable clients to run their apps across on-premises, the edge, and multi-cloud. While Amazon’s (AMZN) AWS remains a market leader, its market share is shrinking, while that of Azure is expanding.
MSFT’s cloud services are also exploring challenging territories such as the screening and testing for the COVID-19. The Citizen Care Pod, a smart screening center for the COVID-19 set up in Canada, has been built leveraging Azure IoT and Azure Cognitive Services.
On October 20, MSFT took cloud computing to the next level by announcing Azure Space. The company will now create cloud capabilities to address the unique needs of space technology.
MSFT doesn’t report specific revenue from Azure. The company only mentions its growth rate. For the fourth quarter for fiscal 2020, Azure grew 47% as against 64% in the same period a year ago. The cloud growth has been slowing for the company owing to the size of Azure. While the cloud usage and Azure adoption increased during the pandemic, getting new customers on board in a competitive market is expected to be tough amid the crisis. MSFT mentioned that the Transactional license purchasing continued to slow, especially in small and medium businesses. The Intelligent Cloud business climbed 17% year-over-year to $13.4 billion.
Besides Cloud, Microsoft Office, specifically Teams has been a big winner amid the pandemic. On the fourth-quarter earnings call, CEO Nadella stated “69 organizations now have more than 100,000 users on Teams and over 1,800 organizations have over 10,000 users on Teams.”
Analysts expect the EPS for the first quarter of fiscal 2021 to climb 11.6% to $1.54. Meanwhile, the revenue estimate for the period is $35.7 billion, indicating an 8.1% growth.
On a year-to-date basis, MSFT surged 36.2% to close yesterday’s session at $214.8.
How does MSFT stack up for the POWR Ratings?
A for Trade Grade
B for Buy & Hold Grade
B for Peer Grade
B for Industry Rank
B for Overall POWR Rating
The stock is also ranked #19 out of 96 stocks in the Software – Application industry.
Adobe, Inc. (ADBE)
ADBE, the maker of hi-end designing software as well as video editor, has successfully transformed itself into a cloud-based business over the past six years. ADBE now offers a group of cloud-based products for designing, web development video editing, photography, and more. Some of its most popular media editing applications including Illustrator, Photoshop, and After Effects are available via subscription.
Besides the creative software, another growth driver for ADBE is its Adobe Experience Cloud segment. This is a holistic marketing and advertising platform that enables businesses to optimize and enhance their engagement with customers. The marketing software is a rapidly expanding business for ADBE. In 2019, this segment generated a revenue of $3.2 billion, compared to $1.4 billion back in 2014. Considering its pace of growth, ADBE is upbeat over its profitability prospects in times to come.
Another business that has reaped major benefits thanks to the coronavirus is its Document Cloud business. This product suite includes tools for remote work collaboration, PDF publishing, and digital signing and storage of documents. Due to the rising demand for cloud-based work-from-home tools, the pandemic has been a boon to ADBE.
In the second quarter, ADBE’s total revenue climbed 14% year-over-year to $3.1 billion. The Annualized Recurring Revenue or ARR for Digital Media jumped to $9.2 billion, while for Document Cloud, the ARR grew to $1.2 billion.
The EPS estimate for the third quarter indicates a 16.2% growth to $2.66, while the street estimates revenue to rise 12.3% to $3.4 billion. ADBE increased 50.4% year-to-date to close yesterday’s trading session at $495.9. In the past year, the stock has rallied 85.8%.
It’s no surprise that ADBE is rated a “Buy” in our POWR Ratings system, with a grade of “A” in Trade Grade and “B” in Buy & Hold Grade, Peer Grade, and Industry Rank. In the Software – Application industry, it is ranked #20.
Salesforce.com Inc (CRM)
CRM is a cloud-based software company that provides customer relationship management seservicesIts suite of enterprise applications also includes marketing automation and analytics, as well as application development. Amid the current wave of digitization, the demand for an end-to-end customer relationship platform is on the rise. Since the beginning of January, the stock has gained 56.3% to close yesterday’s trading session at $254.2.
In September, CRM announced Digital 360, which seamlessly integrates innovations in the Salesforce Customer 360 platform. Through this new extension, CRM aims to empower businesses to respond with agility and scale their operations without hassles ahead of the peak holiday season. Recently, the company also added new products to its Work.com to help companies operate at the optimal level amid the new normal. The products include a new employee workspace and help desk technology for the employees to be more productive. The extension also includes new communication apps to create better relations between customers and employees.
CRM delivered 29% year-over-year revenue growth in the second quarter to $5.1 billion, driven by its Customer 360 platform and robust business model. The company’s EPS jumped to $2.85 compared to $0.11 in the same period last year. Buoyed by the encouraging performance, CRM raised its fiscal 2021 guidance to $ $20.7-$20.8 billion, while the third-quarter revenue is estimated to be around $5.2 billion.
Analysts expect CRM’s EPS for the third quarter to grow 30.3% to $0.75. Meanwhile, revenue for the next quarter is expected to jump 16.3% to $5.2 billion, in line with the company’s guidance.
CRM’s strong fundamentals are reflected in its POWR Ratings. It has a “Buy” rating with an “A” in Trade Grade and a “B” in Buy & Hold Grade, Peer Grade, and Industry Rank. In the 48-stock Software – Business industry, it is ranked #6.
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MSFT shares were trading at $214.36 per share on Thursday afternoon, down $0.44 (-0.20%). Year-to-date, MSFT has gained 37.01%, versus a 8.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...
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