The software industry has not just weathered the pandemic-driven disruptions of the past few years, it has flourished. The industry is expected to continue to witness solid demand due to digital adoption, increasing automation, and demand for cloud services.

Here are two cloud stocks, ServiceNow, Inc. (NOW) and Splunk Inc. (SPLK), which are rated B (Buy) in our proprietary POWR Ratings system, could be ideal additions to your portfolios to capitalize on the industry tailwinds.

Cloud computing is central in all digital business models, from remote working to online classes and cloud kitchens to financial transactions. According to the latest forecast from Gartner, worldwide end-user spending on public cloud services is forecasted to grow 21.7% to $597.30 billion in 2023, up from $491 billion in 2022.

Moreover, 75% of organizations are expected to adopt a digital transformation model predicated on cloud as the fundamental underlying platform by 2026. The global cloud computing market is expected to expand at a compound annual growth rate (CAGR) of 14.1% from 2023 to 2030.

“Organizations today view cloud as a highly strategic platform for digital transformation, which is requiring cloud providers to offer more sophisticated capabilities as the competition for digital services heats up,” said Sid Nag, Vice President Analyst at Gartner.

Let’s discuss the stocks mentioned above in detail:

ServiceNow, Inc. (NOW)

NOW provides enterprise cloud computing solutions that defines, structures, consolidates, manages, and automates services for enterprises worldwide.

On March 22, NOW announced a major platform expansion with the Now Platform Utah release, which is built to help organizations future-proof their businesses and drive outcomes faster in the face of continued economic uncertainty.

On February 27, NOW and AT&T Inc. (T) announced a global telecom product to help communications service providers manage 5G and fiber network inventory.

Rohit Batra, vice president and head of telecommunications, media, and technology products at NOW, said, “Together, ServiceNow and AT&T will work to redefine network inventory, and we will continue to innovate to address the challenges communications service providers face now and in the future.”

NOW’s forward non-GAAP PEG multiple of 1.57 is 6.1% lower than the industry average of 1.67.

NOW’s trailing-12-month net income margin of 4.49% is 66.8% higher than the 2.69% industry average. Its trailing-12-month EBITDA margin of 10.88% is 16.9% higher than the 9.30% industry average.

During the fiscal fourth quarter that ended December 31, 2022, NOW’s non-GAAP total revenue increased 25.5% year-over-year to $2.03 billion. Its net income increased 476.9% year-over-year to $150 million, whereas its net income per share increased 469.2% year-over-year to $0.74.

NOW’s revenue is expected to increase 21.2% year-over-year to $2.09 billion during the fiscal first quarter that ended March 2023. Its EPS is expected to increase 18.5% year-over-year to $2.05 for the same quarter. Additionally, it has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 31.3% over the past six months to close the last trading session at $467.69.

NOW’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.  

It has an A grade in Growth and a B in Sentiment and Quality. The stock is ranked #10 in the 50-stock Software – Business industry.

Click here to see the POWR Ratings of NOW (Stability, Momentum, and Value).

Splunk Inc. (SPLK)

SPLK develops and markets cloud services and licensed software solutions in the United States and internationally.

On March 21, SPLK announced innovations to Splunk’s unified security and observability platform to help build safer and more resilient digital enterprises. SPLK’s latest innovations include enhancements to SPLK Mission Control and SPLUK Observability Cloud, and the general availability of SPLK Edge Processor.

With its platform, organizations can unify, simplify and modernize their workflows and business.

SPLK’s forward non-GAAP PEG multiple of 0.49 is 70.3% lower than the industry average of 1.67.

SPLK’s trailing-12-month gross profit margin of 77.67% is 53.7% higher than the 50.54% industry average.

SPLK’s total revenue increased 38.8% year-over-year to $1.25 billion in the fiscal fourth quarter, which ended January 31, 2023. Its gross profit increased 90.9% year-over-year to $1.05 billion, while its net income came in at $268.79 million, compared to a loss of $140.82 million in the previous-year quarter.

Also, its net income per share came in at $1.44, compared to a net loss per share of $0.88 in the previous-year quarter.

SPLK’s revenue is expected to rise 7.8% year-over-year to $726.79 million during the fiscal first quarter that ended April 2023. Additionally, it has topped consensus EPS and revenue estimates in each of the trailing four quarters.

The stock has gained 16.8% over the past six months to close the last trading session at $91.33.

SPLK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

SPLK also has a B grade for Growth, Quality, and Sentiment. It is ranked #5 out of 23 stocks in the Software – SAAS industry.

To access additional ratings for SPLK’s Momentum, Stability, and Value, click here.

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NOW shares were unchanged in premarket trading Friday. Year-to-date, NOW has gained 20.45%, versus a 8.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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