Cloud Hosting

There is a whiff of recovery in the stock markets at least in the US, and it is time to look for stocks that have the potential to outperform the market going into next year.

High on that list are tech stocks. They have been through a few waves of selling this year but their underlying growth potential is still strong. Precisely because of their recent weakness now may be a good time to look at them again.

At the Armchair Trader we particularly like the prospect for cloud computing and cybersecurity companies, two parts of the tech universe that will be in high demand even when companies or retail buyers try to reign in their spending.

The BVP Nasdaq Emerging Cloud Index has gained over 11% since the start of the year and increased in value by almost 50% over the last five years. Compare this with a year-to-date increase of 2.12% and a 5-year rally of 30% in the DJIA and the case speaks for itself.

The value of the cloud computing market reached $405 billion in 2022 and is expected to mushroom to $1.46 trillion over the next five years.

There are good reasons for it. Cloud computing offers significant cost advantages over using physical infrastructure such as servers and data centres and this is more so the case in the post-COVID hybrid work environment. Cloud computing services companies maintain their high profitability and margins because their services are relatively easy to scale, they are very flexible and increasingly indispensable. Profit margins are high, and providers continue to benefit from economies of scale.

This is an exceptionally dynamic field where technological innovation, such as the development of advanced AI capabilities, edge computing, or hybrid cloud solutions, can significantly impact a companys competitive advantage.

Apart from the biggest players such as Amazon [NASDAQ:AMZN], the industrys first mover and market share leader, and Google parent company Alphabet [NASDAQ:GOOGL] there is whole host of smaller and medium sized companies worth a look.

One of them is US-Dutch company Elastic NV [NYSE:ESTC], a search company that builds self-managed and software offerings for search, logging and analytics use cases. It recently released strong Q1 earnings which featured both stable growth rates and high net expansion rates and forecast a significant increase in year-on-year profitability.

Elastic NVs valuation is still only moderate, even after a share price increase of 40% year-to-date to 70.87. Several forecasters expect the average Elastic NV share price to increase to at least 84 over the next 12 months with some optimistic views reaching as high as 108.

Another prospect is cybersecurity firm Zscaler [NASDAQ:ZS]. The ever more widespread use of AI has also introduced new security issues in the form of AI-enabled cybersecurity attacks and companies are increasing their spending in order to fend off such attacks.

Zscaler has reported revenue of $1.62 billion for the full year 2023, a 48% increase y-o-y and is expanding its product portfolio to cover the whole cybersecurity market. Year-to-date Zscaler share price increased 42%, the stock is up 287% over the last five years.

Also on the radar is Uipath [NYSE:PATH], a company which was founded in Romania but has since become a global software player with headquarters in New York. The company builds platforms that provide what in the past would have been called autopilots technologies designed to carry out definable, repeatable and manageable workplace tasks from basic to increasingly more complex tasks. UiPaths share price is up nearly 40% on the year, trading at 17.07.

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Are cloud computing stocks going to take off in 2024? - The Armchair Trader