Should we keep chasing cloud based stocks?

James Gerrish

Market Matters

Overnight we saw the tech based NASDAQ rally +1.4% to fresh all-time highs with the cloud based stocks continuing to offer huge support to the group e.g. Amazon (AMZN US), Alphabet (GOOGL US), Microsoft (MSFT US) and Alibaba (BABA US). Cloud computing offers investors a wide selection of opportunities from business services to basic internet infrastructure. For readers struggling to visualise this relatively new concept simply consider a warehouse full of data centres packed with computer servers and data storage systems.

Quickly the picture and opportunities become clear from Intel (INTC US) selling chips for the servers to Cisco Systems (CSCO US) selling switches / routers to make the cloud superfast. The cloud has provided phenomenal returns to many investors over recent years whether from storage servers, CPU servers, GPU servers or the many applications of the hardware – to put things in perspective the cloud computing market has grown well above $US250bn with the “big boys” like AMZN and MSFT still competing in the infrastructure services area. Clearly all the names mentioned above are US goliaths but today I have focused on 3 Australian stocks in an effort to identify some good risk /reward opportunities into this huge growth area.

MM remains positive towards the overall cloud industry.

Microsoft ((MSFT US) Chart

1. Megaport Ltd (MP1) $15.81.

MP1 is a provider of elasticity connectivity and network services to over 300 centres globally. On Wednesday the company followed up with another great result, the “network as a service” provider delivered a 66% increase in revenue to $58m while recurring revenue increased ~10%. We believe the company is well positioned for ongoing strong growth as demand for its services increases in-line with the cloud computing boom.

This is a great company /story with the hardest facet being the risk / reward, considering the stocks broken out to new highs we would simply advocate buying now with stops under $15 – a 5% loss is always manageable and blue sky does beckon.

MM likes MP1 moving forward.

Megaport (MP1) Chart

2 NEXTDC (NXT) $11.74

NXT is an excellent innovative data centre operator with a number of impressive operations across Australia. Demand continues to grow for its off-site storage & security as can be seen from the performance of its share price which by definition has enjoyed strong earnings growth – this cycle looks likely to continue. With Australia transitioning to a semi-work from home culture the picture is rosy for NXT as more businesses will need their services.

On the risk / reward front, we would be buyers here leaving $$ to average into the next ~10% pullback.

MM is bullish NXT.

NEXTDC (NXT) Chart

3 Xero Ltd (XRO) $94.79.

New Zealand cloud based accounting platform provider XRO is expanding rapidly into the likes of the US, UK and South East Asia. We like XRO over the medium-term seeing upside in their expansion while excellent client retention is both encouraging and vital. Competition remains in the form of MYOB but XRO appears to have the number on its rival. The huge traditional valuation has kept many investors on the sidelines, our Growth Portfolio went long in April and were already enjoying a 36% paper profit with our dichotomy now do we look to switch to another stock in the sector showing more potential upside into Christmas.

MM likes XRO medium-term but we feel its unlikely to stock will move too far before it reports in November.

MM likes XRO but it feels likely to consolidate.

Xero Ltd (XRO) Chart

Conclusion

MM likes all of these 3 cloud orientated companies as long as investors remain cognisant of the risk / reward.

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Any advice provided is of a general nature only.

Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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