4 stocks not named Amazon or Microsoft that could be cloud winners

  • By Al Root,
  • Barron's
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Cloud storage equipment and software providers are growing revenues at double digit rates—that sounds attractive. But sorting out the winners and losers in the cloud can be like, well, predicting the weather.

Consider: Amazon Web Services, known as AWS, is the leading public cloud provider. Late last month, it announced that it was bringing its cloud expertise into the “on-premise” facility market for a “truly consistent and seamless hybrid cloud.”

That’s a mouthful—but an important one. A hybrid cloud is a combination of public and private clouds. The cloud refers to moving computing power and data storage off a local computer and up into the web. The public cloud is for companies that don’t have dedicated infrastructure and have their information hosted on public platforms like Microsoft’s (MSFT) Azure or Amazon.com’s (AMZN) AWS. A private cloud is for companies that own their own data storage and application networks.

As data generation grows exponentially, the cloud environment is evolving. Now companies want a public/private, or “hybrid” solutions. Sometimes, it’s just to manage a “cloud burst”—when a private network runs out of capacity and data management is transferred to a public cloud. Clever title.

The day Amazon announced its hybrid cloud offering, data storage stocks NetApp (NTAP) and Pure Storage (PSTG) rose 3.2% and 7.5%, respectively. Trying to decipher those moves, however, isn’t easy. Was the release of AWS an opportunity? Or did the Nasdaq’s (NDAQ) 3% rise that day lift the stocks and hide the fact that AWS might be a new threat?

Stifel analyst Matthew Sheerin, for one, writes that NetApp’s strategy is “positioned for growth across all platforms.” He believes that NetApp can thrive in both public and private cloud settings, and notes that the company’s ONTAP software platform is common across both types of clouds. Sheerin’s recent report tags NetApp with a $91 target price. That implies 39% upside.

Pure Storage, on the other hand, is largely a private cloud company, which could makes AWS moving into the on-premise markets more of a threat. Perhaps, but the company also is migrating its offerings into the public cloud via a partnership with, you guessed it, AWS.

One thing that’s certain is that the cloud computing landscape will continue to change. That means its best for cloud novices to invest in a basket of high quality stocks. Pure Storage and NetApp along with VMware (VMW) and Nutanix (NTNX) are four cloud companies with better than average Street recommendations.

Valuation for the four stocks vary widely depending on growth. NetApp trades for 13x estimated earnings, and 2019 top line growth is expected to be 5.1%. Pure Storage trades for 40x estimated earnings, but it’s expected to grow revenues 28% next year. VMware trades for 25x estimated earnings and Nutanix—a 2016 IPO—isn’t even profitable yet.

There are some less volatile ways to play the cloud. For instance, Microsoft is the number two cloud player after AWS. Microsoft is also an $800-plus billion dollar behemoth, so you’re getting a lot more than cloud, but it still has exposure to these trends.

And that’s the biggest takeaway. Cloud computing’s origins can be traced back to 2006, the year Amazon launched AWS. So, the concept hasn’t even hit its teen years. What is certain is that the cloud is here to stay, but what it will look like isn’t known yet.

Kind of like the weather.

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