2 Cloud Services Stocks To Buy, 2 To Sell
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Because the trend of remote working and the ongoing digital transformation are making companies and other organizations vulnerable to cyber-attacks, governments globally have been taking steps to strengthen and secure cloud infrastructure. For example, President Biden signed an Executive Order earlier this year to “move the Federal government to secure cloud services.”
Investors’ interest in cloud stocks is evidenced by the First Trust Cloud Computing ETF (SKYY) and the Global X Cloud Computing ETF’s (CLOU) 9.5% and 15.6% price gains, respectively, over the past three months.
Furthermore, consistent innovation in artificial intelligence (AI) and the Internet of Things (IoT) is expected to help drive the growth of the cloud services industry. According to a ResearchAndMarkets report, the global cloud computing market is expected to grow at a 19.1% CAGR to $1,251.09 billion by 2028. However, with increasing competition in the cloud space, not all stocks are good bets now.
Given the favorable backdrop, we think it could be wise to scoop up the shares of quality cloud services stocks Open Text Corporation (OTEX) and J2 Global, Inc. (JCOM), which hold solid growth prospects. Conversely, we think the prices of RingCentral, Inc. (RNG) and Synchronoss Technologies, Inc. (SNCR) have exceeded their intrinsic values, so they are best avoided now.
Stocks to Buy: Open Text Corporation (OTEX)
Headquartered in Waterloo, Canada, OTEX provides information management software and solutions, such as OpenText security solutions, OpenText Information Management, and OpenText Developer Cloud. Also, its solutions incorporate collaborative and mobile technologies and are delivered for on-premises deployment through the cloud, hybrid, and managed hosted services models.
On Sept. 8, 2021, OTEX announced the integration of N-central into its Webroot Business Endpoint Protection. In the face of increasing cybercrimes worldwide, this integration could provide Managed Service Providers (MSPs) easy access to Webroot’s layered security ecosystem which small- and medium-sized businesses (SMBs) rely on to become more cyber resilient. As a result, OTEX could witness increasing demand for its services.
OTEX’s total revenue increased 8.1% year-over-year to $893.53 million in its fiscal fourth quarter, ended June 30, 2021. Its cloud services and subscriptions revenue was $360.16 million, up 8.3% year-over-year. Its income from operations came in at $171.68 million, representing an 88.4% year-over-year rise. And its net income was $181.28 million, up 586.9% year-over-year, while its EPS increased 560% year-over-year to $0.66.
In terms of trailing-12-month non-GAAP P/E, OTEX’s 16.04x is 35.3% lower than the 24.79x industry average. In addition, the stock’s trailing-12-month EV/EBITDA is 16.25x, which is lower than the 18.91x industry average.
Analysts expect OTEX’s revenue and EPS to increase 2.4% and 3.2%, respectively, year-over-year to $3.53 billion and $3.52 in its fiscal year 2023. In addition, it has surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 17% and has been recently trading at around $53.19.
OTEX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which indicates a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with their own weighting. OTEX has an A grade for Stability, and a B grade for Value, Sentiment, and Quality. Within the Software-Application industry, it is ranked #1 of 146 stocks. Click here to see the additional POWR Ratings for Growth and Momentum for OTEX.
Stocks to Buy: J2 Global, Inc. (JCOM)
Internet service provider JCOM operates through three segments: Fax and Martech; Voice, Backup, Security, Consumer Privacy and Protection; and Digital Media. In addition, it offers cloud services such as cloud fax services, endpoint and email security, and a SaaS platform for cybersecurity awareness and compliance training.
JCOM acquired Moz’s stocks and DailyOM’s assets in July 2021. These moves are expected to help JCOM expand its product line-up and grow its consumer base.
For its fiscal second quarter, ended June 30, 2021, JCOM’s net revenue increased 29.6% year-over-year to $429.04 million. Its operating income came in at $94.28 million, up 29.1% year-over-year. Its non-GAAP net income was $107.86 million, representing a 33.8% year-over-year rise. Also, its non-GAAP EPS increased 40.9% from the same period last year to $2.41.
In terms of trailing-12-month EV/EBITDA, JCOM’s 11.82x is 37.5% lower than the 18.91x industry average. Also, its 13.96x trailing-12-month non-GAAP P/E is 43.7% lower than the 24.79x industry average.
JCOM’s revenue is expected to be $1.75 billion in its fiscal year 2021, representing a 17.4% year-over-year rise. The company’s EPS is expected to increase 18.9% year-over-year to $9.73 in the current year. In addition, it surpassed the Street’s EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 93.7% in price and has been recently trading at around $134.74.
It’s no surprise that JCOM has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has a B grade for Value and Quality. JCOM is ranked #5 of 41 stocks in the Internet – Services industry. Click here to see the additional POWR Ratings for JCOM (Growth, Stability, Momentum, and Sentiment).
Stocks to Avoid: RingCentral, Inc. (RNG)
Software-as-a-service (SaaS) solutions provider RNG’s products include RingCentral Office, RingCentral cloud contact center as a service (CCaaS), and RingCentral Glip. It serves a range of industries, including financial services, healthcare, technology, and construction.
On Aug. 25, 2021, RNG announced a range of new capabilities, including Dynamic End-to-End Encryption (E2EE), to help organizations run and grow their business more effectively. However, it’s uncertain if the company will attract significant demand for the solution amid the intensely competitive environment.
RNG’s total revenue for the second quarter, ended June 30, 2021, came in at $379.27 million, up 36.4% year-over-year. However, its total operating expenses increased 50.7% year-over-year to $347.73 million. Its net loss was $110.96 million, versus net income of $509,000 in the prior year’s quarter. Also, its loss per share was $1.22 compared to EPS of $0.01 in the year-ago period.
In terms of trailing-12-month non-GAAP P/E, RNG’s 207.02x is 732.1% higher than the 24.88x industry average. Moreover, its 16.90x trailing-12-month EV/Sales is 280.6% higher than the 4.44x industry average. Over the past nine months, the stock has lost 31.5% in price and has been recently trading at around $218.98.
RNG’s POWR Ratings reflect its poor prospects. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. We’ve also rated it for Growth, Value, Momentum, Stability, Sentiment, and Quality. Click here to access all the RNG ratings. RNG is ranked #43 of 60 stocks in the D-rated Software – Business industry.
Stocks to Avoid: Synchronoss Technologies, Inc. (SNCR)
Global software and services company SNCR’s platforms, products, and solutions include cloud sync, backup, storage, device setup, content transfer, and content engagement for user-generated content. In addition, the Bridgewater, N.J.-based company offers software development and customization services.
On July 1, 2021, SNCR closed $235 million common stock and senior notes offerings. The company is expected to use the net proceeds to refinance its capital structure. However, this could lead to share dilution.
For the second quarter, ended June 30, 2021, SNCR’s net revenue decreased 6.5% year-over-year to $71.53 million. Its net loss came in at $23.95 million compared to $10.15 million in the prior-year period. Also, its total assets were $463.69 million for the period ended June 30, 2021, versus $482.26 million for the period ended Dec. 31, 2020.
In terms of trailing-12-month EV/EBITDA, SNCR’s 653.97x is 3,408.4% higher than the 18.64x industry average Also, its 34.95x trailing-12-month P/CF is 56.9% higher than the 22.28x industry average.
SNCR’s revenue is expected to be $278.27 million in its fiscal year 2021, representing a 4.6% year-over-year decline. Also, the company’s EPS is expected to decrease 5,500% year-over-year in the current year. Over the past six months, the stock has declined 37.3% in price and has been recently trading at around $2.43.
SNCR’s POWR Ratings are consistent with this bleak outlook. The stock has a D rating for Sentiment and Quality in our proprietary rating system. Click here to access the additional POWR Ratings for SNCR (Growth, Value, Momentum, and Stability). SNCR is ranked #94 in the D-rated Software – Application industry.
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TM Editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.
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