3 US Cloud Computing Stocks for Every Equity Investor

Healthy gross margins, big growth opportunities, solid balance sheets, and attractive dividends.

| More on:
woman data analyze

Image source: Getty Images.

The cloud is a remote environment where computing power and data storage are hosted and software applications are served remotely via the internet. And while some investors might consider investing in cloud stocks risky because the technology is relatively new, there are three relatively stable cloud computing stocks worth a closer look.

Microsoft is transitioning its business from PCs to the cloud

Microsoft (NASDAQ: MSFT) is one of the most valuable companies in the world, with a market cap of over $1 trillion (yes, with a “t”). The company, once best known for the operating system installed on personal computers, began transitioning to the cloud as PC sales slowed with the proliferation of mobile devices.

Today, Microsoft’s Azure unit is one of cloud computing’s largest Infrastructure as a Service (IaaS) offerings. For the year ended June 30, 2019, Azure’s revenue grew 64%. According to Microsoft, Azure has an “unlimited [Total Addressable Market].” It represents about a third of Microsoft’s revenue and contributes largely to the company’s 69% gross margin.

Microsoft boasts a low debt-equity ratio of 0.71 and has more than $11 billion in cash. Its balance sheet is rock solid. It generates more than $3.00 per share in free cash flow annually; more than 1.5 times its dividend payout. Microsoft has paid a quarterly dividend since 2003 and has grown it at a compound annual growth rate (CAGR) of 10.41%. The yield is approximately 1.3%.

Oracle’s current customers are its primary growth opportunity

Oracle (NYSE: ORCL) is the leading database software company in the world with a market cap of more than $178 billion. Its more than 430,000 customers worldwide represent its biggest growth opportunity. Oracle is rapidly converting many of these “on-premise” (i.e., software is hosted locally, not delivered through the cloud) customers to a Software as a Service (SaaS) model, which translates into a three-fold revenue multiplier for Oracle.

This customer conversion helped Oracle generate a nearly 80% gross margin in the year ended May 31, 2019 and gives it another great growth opportunity. Many of those customers run back-office business applications that are not Oracle products. As customers transition their Oracle applications to the cloud, Oracle also aids them in converting those other back-office applications, replacing them with Oracle products. If just a fraction of those customers switch to an Oracle product, Oracle stands to book an additional $21 billion in revenue.

Oracle’s debt-equity ratio is 2.31. Nevertheless, its debt is A1 rated by Moody’s and therefore investment grade (defined as Baa3 or better). Oracle had more than $20 billion in cash and equivalents at the end of its last fiscal year and generated more than $53 billion in free cash flow. Oracle has paid a dividend every quarter since 2009 and has grown it at a CAGR of nearly 17%. It yields approximately 1.7%.

Mixing on-premise computing with public and private cloud helps IBM deliver a hybrid solution

IBM (NYSE: IBM) is arguably America’s first tech company. Founded in 1911, IBM has survived more than 100 years by evolving as times and technology have changed. Today it is the leading provider in a $1.2 trillion hybrid cloud opportunity.

IBM is leveraging the technology obtained in its recent acquisition of Red Hat and expects it to create “double-digit revenue growth in 2020.” When IBM reported earnings for the year ended December 31, 2018, it posted a gross margin of 46.4%. IBM’s debt-equity ratio is 3.51, and like Oracle, its debt is rated A1 by Moody’s. IBM also has a solid balance sheet with more than $12 billion in cash. IBM’s total current assets amount to more than $49 billion. It generated more than $8.37 per share in free cash flow last year. That is about 1.4 times the amount required to cover their annual dividend commitment. IBM has paid a dividend every quarter since 1913. Right now, the yield on IBM’s dividend is approximately 5% (try finding that in an A1-rated bond).

Stocks any equity investor can own

All three of these companies are profitable and have healthy gross margins. Each has a strategy to grow revenue and free cash flow. They all have solid balance sheets and plenty of cash on hand. They each have a history of growing their dividends and the yield on each of them rivals what fixed income (bond) investors might expect to earn on a seven to 10-year investment grade note.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anthony Termini owns shares of Microsoft. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool is short shares of IBM and has the following options: short January 2020 $200 puts on IBM, short September 2019 $145 calls on IBM, long January 2020 $200 calls on IBM, and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

More on Tech Stocks

data analyze research
Tech Stocks

2 TSX Growth Stocks I’d Buy and Hold Forever

Given their long-term growth potential and discounted stock prices, I believe these two TSX growth stocks would be an excellent…

Read more »

A worker uses the cloud for paperless work. tech
Tech Stocks

1 Little-Known Canadian Stock to Buy Before Everyone Else Does

Softchoice is a top TSX stock for value and growth investors due to its widening profit margins and top-line expansion.

Read more »

four people hold happy emoji masks
Tech Stocks

3 Undervalued Canadian Stocks Worth a Buy Right Now

These Canadian stocks remain highly underrated, given their future path to growth and past performance that remains incredibly strong.

Read more »

Man holding magnifying glass over a document
Tech Stocks

Stock Split Watch: Is Constellation Software Next?

Many stocks that got to the same price as Constellation Software (TSX:CSU) split their stocks. Is CSU next?

Read more »

Shopping and e-commerce
Tech Stocks

Lightspeed Stock Fell 15% in November – Is it a Buy Today?

Lightspeed stock may have a rough 2023, but that doesn't mean you should ignore it, even after shares dropped .

Read more »

A gamer uses goggles to play an augmented reality game. tech
Tech Stocks

1 Growth Stock to Buy Ahead of the Trillion-Dollar Metaverse Opportunity

One TSX growth stock is an exciting prospect and strong buy as the full development of the Metaverse unfolds.

Read more »

A worker uses a laptop inside a restaurant.
Tech Stocks

2 Promising Growth Stocks to Buy in December 2022

Growth investors had better act fast, because these fire-sale prices won’t last forever. Here are two discounted growth stocks to…

Read more »

Dice engraved with the words buy and sell
Tech Stocks

Selling Losers Before 2023? Buy These 2 TSX Stocks With the Proceeds 

There is one month to 2023. Now is the time to sell your loss-making stocks, take the tax advantage, and…

Read more »