These cloud computing stocks to buy have been unfairly punished due to unfounded AI threats
Since OpenAI launched ChatGPT in November 2022, the AI thesis has lifted many technology stocks. However, software stocks have recently faced the perfect storm as investors price in the risk of AI disruption. Due to uncertainty, investors are throwing out the baby with the bathwater, presenting some cloud computing stocks to buy now.
Over the past three months, the iShares Expanded Tech-Software Sector ETF (BATS:IGV) is down 3%, while the S&P 500 is up over 5%. The underperformance is due to the risks AI could pose to SaaS models. For instance, if AI automates repetitive tasks, it could negatively impact human resource management software stocks due to lower employee numbers.
Although these challenges are real, some cloud computing stocks to buy now are well insulated from these risks. For example, database software stocks will benefit since data is the essential ingredient for AI, according to Altimeter’s Brad Gerstner. With cloud computing stocks trading at a 20% discount to their historical multiple, it’s time to be selective and buy these defensible business models.
After a 20% drop over the past three months, this data lake and data warehouse provider is a buy. From a valuation perspective, Snowflake (NYSE:SNOW) is trading at one of its lowest multiples since listing in September 2020. According to Seeking Alpha, it has a trailing twelve-month price-to-sales of 14 compared to the five-year average of 42.
Based on the multiple compression, one would think that Snowflake’s business prospects have declined materially. However, that’s not the case. Instead, management believes that AI will enhance the capabilities of its data platform. For instance, it has developed Cortex AI to support customers in creating generative AI applications on top of their data.
By the end of Q1, Snowflake saw impressive adoption rates from customers. Over 750 customers were using Cortex AI. In addition, the company is developing other AI capabilities like Snowpark Container Services. Management expects these emerging AI products will be meaningful revenue contributors down the road.
In the short term, SNOW stock has diverged from its fundamentals. While product revenues accelerated in Q1 of 2025 to 34% year-over-year (YOY) compared to 33% in the previous quarter, the stock has fallen 20% since earnings. Consequently, its sales multiple is at a historic low, making it one of the top cloud computing stocks to buy now.
MongoDB (NASDAQ:MDB) is another stock that has suffered due to the threat of AI and the risk of disruption. Year-to-date (YTD), the stock is down a whopping 44%. However, the markets are mistaken, and this stock should be on your cloud computing stocks to buy now list.
Enter the bull case. Artificial intelligence needs a lot of data to train large language models. Indeed, to improve the models, large data sets of diverse data are required. Furthermore, in some cases, companies need domain-specific data or their own data to improve their AI applications. In short, there will be exponential growth in data requirements that will suit database providers like MongoDB.
Besides AI, another growth driver for MongoDB is the migration from traditional relational databases to its document-based model. It has a 2% market share in an over $90 billion market, growing $10 billion to $15 billion annually. This presents a multi-year tailwind for MongoDB.
Results show that this migration trend is ongoing. In Q1, Atlas, its database-as-a-service offering, grew revenues by 32% YOY. This cloud offering now accounts for 70% of total revenues. These results show solid execution, which will propel the stock higher as it gains market share.
On June 13, Adobe (NASDAQ:ADBE) reported a better-than-expected quarter and raised guidance for the year. The impressive quarter put to bed investor fears. Adobe is one of the best creative tools and is well-positioned to grow.
Despite the 14.5% rally on earnings, Adobe at $525 is still over 15% below its February 2 high of 634. In addition, ADBE stock is a bargain at 28 times forward non-GAAP earnings compared to its five-year average of 35. After this pullback and multiple compression, this is one of the best cloud computing stocks to buy.
Further, Adobe was down YTD on fears that image and video generation tools from ChatGPT and other AI tools would disrupt its creative suite. However, the earnings report revealed that Adobe is also innovating rapidly in this field. For instance, it has trained its Firefly generative AI models to deliver AI functionality in Photoshop, Premiere, Illustrator and Lightroom.
Wall Street Analysts agree that Adobe is one of the top cloud computing stocks to buy. On earnings, Bank of America analysts reiterated their buy rating and $640 price target. They note that momentum in Digital Media and Experience businesses will drive the stock higher.
On the date of publication, Charles Munyi had a long position in SNOW but did not hold (either directly or indirectly) any positions in other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.
Article printed from InvestorPlace Media, https://investorplace.com/2024/06/3-cloud-computing-stocks-to-buy-now-june-2024/.
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