When the Nasdaq Composite took a nosedive to start the year, it took many tech stocks down with it. Some of the worst-hit names were cloud computing stocks.
However, as the market has regained its footing, so have many of the cloud stocks. Here are three companies that I think are poised to profit from the growth of the cloud market. These are my top three cloud stocks to buy right now.
Image source: Getty Images.
1. Amazon
When it comes to cloud computing, Amazon (AMZN -1.11%) is the king. According to Synergy Research Group estimates, Amazon Web Services (AWS) holds a 34% share of the $200 billion annual cloud infrastructure market.
AWS provides its customers with everything from data storage and networking to analytics and machine learning. By migrating legacy systems, servers, and processes online, AWS helps create efficiencies for its customers while gaining lucrative recurring revenue for Amazon.
And unlike Amazon's e-commerce business, AWS boasts strong margins. The segment posted $5.7 billion of operating profit in the second quarter, more than the $3.3 billion total for the entire company.
Despite all this, Amazon's stock endured a pretty miserable first half of the year. Shares were down 34% at the halfway point. Yet, after a high-profile stock split, shares have bounced back. However, they're still trading well below their average price-to-sales ratio. Smart investors would be wise to pick up shares of the cloud king now -- while they can still do so on the cheap.
2. Microsoft
My second top cloud stock to buy in August is Microsoft (MSFT -0.66%). Make no mistake; this isn't your father's Microsoft anymore. Microsoft is now a cloud company first and a personal computing company second -- or maybe even third.
In its most recent quarter (the three months ending on June 30), Microsoft reported $20.9 billion of revenue from its Intelligent Cloud segment. That represented more than 40% of the company's overall revenue of $51.9 billion for the quarter. That makes Cloud Microsoft's largest segment by revenue.
In addition to bringing home the bulk of the company's revenue, it's also growing more quickly. Cloud grew 20% year over year -- much faster than Microsoft's Personal Computing (2%) or Productivity and Business Processes (13%) segments.
This size and growth is not surprising when considering Microsoft's cloud market share. According to Synergy Research Group, Microsoft holds 21% of the cloud infrastructure market -- second only to AWS. What's more, it turns out Microsoft has teamed up with Oracle in a bid to build synergies with its much-smaller cloud competitor.
While Microsoft remains relatively expensive on a price-to-earnings basis, there is a reason: It's a great company. It's well run; it has a significant share of the red-hot cloud market. Moreover, it boasts one of the best returns on equity (ROE) in the technology sector.
It may not be the same company as 20 years ago, but Microsoft remains a great investment.
Image source: Getty Images.
3. Snowflake
My final top cloud stock to buy is Snowflake (SNOW -1.00%). If Amazon is the king of cloud computing, think of Snowflake as a skilled diplomat.
You see, the cloud marketplace is dominated by several big players: Amazon, Microsoft, and Alphabet, which together control almost two-thirds of the cloud market.
But this can present problems for cloud customers who rely on multiple vendors. In this scenario, data can become siloed, with organizations unable to aggregate their own data.
Snowflake solves this problem by acting as a middleman. The company straddles multiple platforms, aggregates data, and delivers analytics and insights -- providing knowledge that might otherwise be lost.
In this way, Snowflake allows companies to remain flexible with their overall strategy, perhaps using several cloud providers -- without sacrificing data visibility.
Snowflake is tiny compared to Amazon and Microsoft, with a market cap of $52 billion. It's also unprofitable, and management expects those losses to continue in the near term. However, the company remains solidly in the growth phase right now, and it is growing by leaps and bounds. Snowflake's revenue jumped 85% year over year, and its customer base is surging.
What's more, Snowflake has attracted the interest of the most famous investor of all, Warren Buffett. Buffett's Berkshire Hathaway owns over 6 million shares of Snowflake.
Potential investors in Snowflake should think like Buffett and accumulate shares for the long term. The cloud market will continue to grow for many years to come, and Snowflake's business should do the same.
