Cloudflare (NYSE:NET) – high network performance will attract customers
Shopify (NYSE:SHOP) – investments in business will expand market share
Splunk (NASDAQ:SPLK) – investors expect the company to reach a path to profitability sooner
VMware (NYSE:VMW) – product portfolio leads to expanded margins
Investors panic-sold cloud computing stocks that benefited from the coronavirus-driven lockdown in the first quarter of 2022 as they worried that the trend was ending.
Cracks in even the most optimistic view for exponential growth faded. Cloud infrastructure companies posted weaker quarterly results. Management lowered guidance for the next quarter, then for the next full year.
At first, Fed members labeled inflation as transitory. Yet the great resignation, a movement that is potentially ending, forced companies to pay higher wages.
These two factors have combined to make several cloud stocks look much more attractive.
Looking ahead, the Fed’s higher interest rates will hurt stock valuations. This will create an attractive entry point for cloud computing stocks.
Datadog
DDOG
$134.29
Fastly
FSLY
$18.12
Limelight Networks
LLNW
$4.92
Cloudflare
NET
$109.77
Shopify
SHOP
$603.18
Splunk
SPLK
$132.61
VMware
VMW
$111.05
Cloud Computing Stocks to Buy: Datadog (DDOG)
The Datadog (DDOG) logo displayed on a laptop screen.
Source: Karol Ciesluk / Shutterstock.com
Datadog posted fourth-quarter revenue growing by 84% year-over-year to $326 million. The monitoring and security platform for cloud applications firm said that its annual recurring revenue from large customers grew. It now has 216 large-sized customers generating $1 million or more in ARR.
DataDog’s strong outlook for the first quarter suggests healthy demand momentum. When it reports results, DDOG stock may lift on Q1 revenue at between $334 million and $339 million.
It will earn up to 12 cents a share. For the fiscal year of 2022, DataDog expects revenue of between $1.51 billion and $1.53 billion. The company will post non-GAAP net income a share of up to 51 cents.
Investors who want to add growth names to their portfolios would do well to buy DataDog shares this month. The company will likely exceed expectations. It positioned its core products to capture corporate demand for security. The addressable market for security is at least $20 billion.
As weaker firms rely on advertising to attract customers, DataDog will not need unsustainably higher expense growth. Markets will reward dominant companies while dumping positions in under-performers.
Fastly (FSLY)
A magnifying glass zooms in on the Fastly (FSLY) website.
Source: Pavel Kapysh / Shutterstock.com
Fastly is the world’s fastest global edge cloud network provider. In the fourth quarter, the company posted revenues of $97.72 million.
While the market has been keen to sell companies that do not earn money, investors shouldn’t punish Fastly for its non-GAAP EPS of a 10 cent loss.
Fastly reported non-GAAP gross margin of 55.8%, down from 63.7% year-over-year. Looking ahead, its revenue will be in the range of $97 million to $100 million. And for the year, Fastly’s revenue should top $410 million.
Hopeful investors who bought FSLY stock at more than $55 paid too much. Now that the stock bottomed in the teens, bears cannot rely on lower valuations to bet against further downside. To reaccelerate growth, Fastly must grow its customer base. This is an uphill battle. Edge cloud computing is a fiercely competitive market.
Speculators may bet that markets over-reacted to Fastly’s decelerating growth in the last few quarters. The company may lower its pricing to increase sales volume. This should lure customers from competitors and lead to an April bounce in the stock price.
To sustain an uptrend Fastly needs to hold its strong content delivery network traffic volumes.
Cloud Computing Stocks to Buy: Limelight Networks (LLNW)
Image of computer servers lined up in a dark room
Source: Gorodenkoff/Shutterstock.com
Limelight Networks bottomed last year. With LLNW stock in a strong uptrend, investors should consider the company now. On March 7, Limelight acquired Yahoo’s EdgeCast CDN service.
Limelight will rebrand Edgecast as Edgio. This acquisition enables the company to offer edge computing, CDN and streaming delivery services.
Functions@Edge is an unexplored territory. FaaS is a serverless computing solution that customers will want. The Limelight and Edgio combination raises the firm’s global network capacity to more than 200Tbps and over 300 Points of Presence (or PoP) globally.
In January, Limelight said it set a new online traffic delivery record. Several of Limelight’s largest clients increased their volumes.
The company’s strong start this year will lift quarterly results. Furthermore, past investments in research and development improved Limelight’s network performance. Despite congested and changing network conditions, clients did not face any quality issues. In the next earnings report, expect LLNW stock to rise as it posts higher gross margins.
When Limelight increases its gross margin forecasts for the year, the stock has a good chance of rising further.
Cloudflare (NET)
An illustration a Cloudflare (NET) logo is seen displayed on a smartphone
Source: IgorGolovniov / Shutterstock.com
Cloudflare traded as low as $80 throughout the first quarter and bounced back each time. The web infrastructure firm posted revenue of $193.6 million, up by 54% year-over-year.
Cloudflare’s operating cash flow growth will allay investor fears that NET stock trades at too high a valuation. Gross profit in Q4 was $153.3 million or 79.2% gross margin. On a GAAP basis, it lost $41.4 million, up from $24.7 million last year. As a growth firm, investors should look beyond the losses.
The company invested heavily in the back half of 2021 to speed up its network. It continues to increase the CDN’s reliability. For example, every time it adds another provider, Cloudflare has control to optimize for performance and reliability.
Cloudflare’s customers will expect it to offer a high-performance network. Furthermore, they will take advantage of its zero-trust offering. Cyberattack risks will increase this year, so customers need to protect themselves from denial of service attacks.
Corporations will not require their staff to return to the physical workplace full time. In a hybrid model, they will need to set up virtual desktops to support working from home. Cloudflare’s zero-trust network initiative will protect them from cyberattack risks.
Cloud Computing Stocks to Buy: Shopify (SHOP)
There Are Still so Many Problems With Shopify Stock
Source: Paul McKinnon / Shutterstock.com
Shopify spooked investors when it posted fourth-quarter results that indicated a slowdown in the business.
Shopify posted revenue growing by 41.1% to $1.38 billion. It earned $1.37 a share (non-GAAP). Investors who merely skimmed the forward guidance cannot expect its growth would match 2021 levels.
Shopify’s President Harley Finkelstein tempered expectations by noting the extraordinary growth in the last two years. It nearly tripled its revenue, more than doubled its gross merchandise volume and staff, and nearly doubled merchant counts from 2019 levels.
The e-commerce platform company invested its gross profit dollars heavily into the business. Shopify will capture many opportunities ahead from here.
As the digital commerce transformation unfolds, shareholders shouldn’t watch the company’s operating income on a quarter-to-quarter basis. Growth will accelerate over several years, as investments into Shop App, Shopify POS and Shopify Fulfillment Network pay off.
Investors should watch Shopify’s three-year investment cycle lead to higher capacity and fulfillment capabilities. This will renew its revenue potential in the quarter ahead.
Splunk (SPLK)
Splunk (SPLK) logo on the company office in Santana Row.
Source: Michael Vi / Shutterstock.com
Splunk signaled multiple bottoms at $110 since Dec. 2021. Despite the recent rally, the strong fourth quarter will justify higher valuations from here.
For 2022, Splunk expects cloud ARR of at least $2 billion. Total ARR will be around $3.9 billion, but the non-GAAP operating margin will be between 0% and 2%.
Amid Nasdaq’s Q1 correction, investors dumped companies that did not make money. Splunk beat Wall Street’s expectations yet it is still losing money. Still, traders are taking a “risk-on” approach with SPLK stock. The company has the momentum to exceed its 2022 forecast.
Splunk is better off growing revenue while accelerating expenses at a faster pace. Though it will lose money in the near term, the company needs to retain talented professionals. The economic downtrend ahead will hurt weaker firms.
When that happens, Splunk may rely on the efforts of its staff to deliver a stronger product. This will increase ARR and shorten Splunk’s path to profitability.
Cloud Computing Stocks to Buy: VMware (VMW)
The VMWare logo outside of an office building
Source: Sundry Photography / Shutterstock.com
VMware fell after its largest shareholder, Dell (NYSE:DELL), spun off shares. The selling overhang will end this month as investors look at VMW stock valuations.
The virtual machine software provider posted strong subscription and SaaS revenue. Expect steady customer demand for its solutions to continue.
Subscription and SaaS, plus license revenue, added $1.9 billion in revenue, up by 11% year-over-year. This is a preferred type of revenue because the company may enjoy its predictable results.
VMware will build its sales by scaling its multi-cloud platform. Customers need a simplified capital structure to cut costs. Inflationary pressures will increase costs, so customers need to lower technology costs for cloud management solutions.
VMware will expand margins by promoting Carbon Black Cloud and VMware Tanzu (a developer tooling solution) to current customers. The company’s Tanzu application platform is maturing.
VMware positioned Tanzu and its product portfolio to meet customer demands for cloud solutions.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
