Friday, February 23, 2024
Dividend Stocks

3 Sorry Cloud Computing Stocks to Sell in February While You Still Can

Cloud computing stocks represent companies affecting a revolutionary development for the software industry. Being able to host many services through a central hub has brought down costs and made it far easier to deliver service at scale. Cloud has transformed the industry and made investors, in aggregate, a ton of money.

But not all cloud computing stocks are created equal. In fact, some are still struggling to achieve strong profitability and face significant competitive challenges. These are three of the lesser cloud computing stocks that aren’t worth owning in February 2024 or beyond.

Twilio (TWLO)

Twilio (NYSE:TWLO) operates a cloud communications platform which offers developers a customer engagement ecosystem.

Twilio’s interface provides a set of application programming interfaces that allow developers to build voice, messaging, and e-mails into their marketing and customer engagement routines.

Twilio was an exceptionally hot stock in the early days of the pandemic. Online shopping was taking off, and use of things such as delivery apps soared as well. This was a fertile environment for Twilio to land new clients and get far more messaging traffic from existing ones.

Despite this generational growth opportunity, Twilio has struggled to turn it into a strongly profitable business.

Even with the stock down more than 75% from its all-time highs, shares still sell for more than 30 times forward earnings.

The company’s revenue growth rate has dipped into the single digits. While the share price is down tremendously, TWLO stock is still a value trap among cloud computing stocks given its uneven profitability and decelerating growth rate.

Activist investors are circling the company, but if they aren’t able to make changes, shares will trade lower in coming months.

ARM Holdings (ARM)

ARM Holdings (NASDAQ:ARM) is a leading semiconductor company which went public in 2023. The company delivers central processing units and other related gear to technology companies to drive their cloud computing and AI solutions.

ARM has enjoyed a considerable ramp-up in business thanks to the recent AI boom. The company reported strong earnings this week and shares jumped over 50% following the favorable earnings report.

It’s understandable why investors are excited. However, the rally seems overblown. Shares are now trading at roughly 100 times forward earnings, which is a steep price for a company which analysts see growing revenues about 20% over the next year.

ARM is a solid company with an attractive product set, however the valuation has run far ahead of any reasonable measure thanks to cloud computing and AI excitement.

Veeva Systems (VEEV)

Veeva Systems (NYSE:VEEV) is a cloud computing company which offers customer relationship management software for the life sciences industry.

In effect, Veeva is the Salesforce.com (NYSE:CRM) for pharmaceuticals and biotech companies.

This is a fine niche, to be certain. Few people would dispute that Veeva has built an attractive business serving this healthcare sales vertical.

However, after the recent rally, Veeva is now trading at more than 45 times forward earnings. It also goes for close to 15 times forward revenues. This is an awfully expensive price for a company which analysts expect to grow revenues just 9% in fiscal year 2024.

Veeva is a solid company, but the cloud computing enthusiasm has driven shares up to a level well beyond what the firm can reasonably be expected to deliver over the next few years.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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