If you’ve been studying stock trends over the past several years, you will have noticed that cloud stocks are doing incredibly well.
Many organizations have realized this and have begun to migrate their technological needs to the cloud platform, which is giving rise to numerous industries in the modern age.
Many stock experts have made it clear that multibagger stocks will be related to cloud technology in the near future, which is why this article aims to give you a breakdown of how and why to invest in cloud technology.
Before we get into the details of investment in cloud technology, let’s try to understand what cloud technology is.
What is Cloud Technology?
Cloud computing connects various technological aspects to the same platform, including your phone, video game console, TV, and many more.
It offers the delivery of computing services through the Internet, making it possible for you to subscribe to its use to enhance your networking, software use, and data storage.
If you’re looking to access cloud applications and services, you can do so by using your web browser or a specific application.
You can also access the cloud platform through private networks, making it possible for you to avail these cloud computing services for your personal needs or to offer these services to different users.
The public cloud entails the sharing of hardware by different users, which works well to cater to a wide audience and only requires the use of a stable internet connection.
The private cloud is more applicable for dealing with private data and applications, allowing access through private networks or a VPN.
However, many organizations take a hybrid approach where they use both public and private clouds for maximizing security and having greater control over operations while also offering flexibility to the users.
Reasons to Invest in Cloud Technology
Studying trends in the technology sector has made it clear that cloud technology is growing rapidly and has continued to perform exceptionally well despite the far-reaching and severe effects of the global pandemic crisis.
More growth is expected since companies intend to transfer numerous activities to the cloud, which will likely generate exponential revenue of 1 trillion USD in the coming years.
This will be a massive jump from the revenue generated in 2019, 233 billion USD, which is expected to grow due to the added flexibility offered by cloud computing.
As a result, business models continue to adapt and change according to the current times, and a plethora of innovative services are becoming available for users to avail.
The investment landscape is changing dramatically for the better, and companies are eager to invest in cloud infrastructure along with the hardware that accompanies it, making it possible to leverage the numerous advantages of cloud computing.
The top five companies that are utilizing the cloud’s Infrastructure as a Service (IaaS) platform are Amazon, Microsoft, Google, IBM, and Oracle.
Other major companies using the cloud’s Software as a Service (SaaS) platform are Netflix, Zoom, Adobe, Slack, Cloudflare, and Shopify.
How to Invest in Cloud Technology
Investing in cloud technology requires you to know how to analyze cloud computing stocks by reading and discerning data and studying trends.
You cannot use the standard valuation metrics for finding and purchasing stocks, which is why you need to focus on understanding four main aspects of cloud stocks: price to sales ratio, the rule of 40, total addressable market and market share, and the trends and change in momentum.
If you spend adequate time doing your research, you will find that many cloud stocks are not worth investing in right now because they’re not generating any profits.
The price-to-sales ratio doesn’t apply to these stocks that are still in their early stage, but you can still compare this value with other similar stocks to know which ones will be profitable to invest in the coming years.
The PTS ratio can be anywhere between 1.5 to 50, whereas a higher ratio may only be sustainable if margins are expanding quickly.
The rule of 40 has become quite popular in understanding the patterns of profitable cloud stocks, and you need to use a simple equation to know a stock’s profitability.
Adding the yearly revenue increase to the net profit margin results in a particular score that slows you from making an investment decision.
For example, if a company sees a yearly growth rate of 40% and a profit margin of 10%, it has a score of 50.
Generally, stocks that are above 40 are worth investing in and evaluating in more detail.
When looking at the total addressable market and market share, you need to understand the historical significance of existing data, but that only paints a small picture.
You also need to consider the size of a market and an organization’s share in it, allowing you to understand the possibilities of a new market.
Market leaders need to be researched for every market segment, and growth must be consistent for it to be worth investing in.
It must be pointed out that investing in stocks is risky since there are numerous factors affecting profitability, which is why you can look at the trend and momentum of a stock’s pricing, allowing you to reach an informed decision about whether an investment is feasible and will amount to anything significant in the near future.
Many investors take a risk-free approach where they only invest in cloud stocks that are seeing a rising trend while ignoring any that fall below the 200-day moving average.
If you’re interested in the inner workings of cloud computing stocks, you can also invest in an exchange-traded fund, which may be beneficial if you’re looking to maximize profits through investment.
Although many ETFs show exceptional and consistent performance, you should also know that excess returns can become increasingly volatile.
The cloud space pretty much guarantees exceptional growth in the coming years but requires a keen and diligent eye for evaluating current conditions and making investments based on sound analysis.