Top 5 Cloud Storage Stocks in 2023

Empowering creatives all over the world with cloud-based solutions.

Adobe is a diversified global software company operating through 3 segments: Digital Media, Digital Experience, and Publishing and Advertising.

It is a market leader in multimedia and creative software development with a significant impact on creative software solutions over 4 decades of its existence. Many of its products are industry-standard design, document management, and web development.

A decade ago, Adobe launched Creative Cloud – a set of applications and services accessible on a subscription basis. Adobe’s cloud services enable users to access their applications and services from anywhere, with seamless collaboration, storage, and updates across devices, making it a key player in the cloud storage market.

In the fiscal year 2022, Creative Cloud grew 13%, exceeding US$10 billion and delivering most of Adobe’s US$17.6 billion in yearly revenue.

With the run rate of new subscriptions close to 1 million per quarter, Adobe’s Cloud services are growing. Even with the acquisition of Figma yet to go through, this US$20 billion bet on could-based design could be the final piece of the puzzle for market dominance.

Finally, the company doesn’t pay dividends but does engage in share repurchasing when suitable – buying back approx. 15.7 million shares in 2022. Still, the balance sheet looks solid, with more cash than the total debt. Therefore, it is unsurprising to see the company pursue growth at profit margins of almost 30%.

Provider of proprietary cloud storage software solutions.

Starting in 1992 as Network Appliance, NetApp grew into a leading hybrid cloud data services and data management company. It is structured into two segments: Hybrid Cloud and Public Cloud.

Hybrid Cloud focuses on software, hardware, and service components with a portfolio of storage management and infrastructure solutions like cloud-connected all-flash, hybrid-flash, and object storage systems. Meanwhile, Public Cloud offers products delivered primarily as a service.

The most prominent NetApp product is ONTAP Data Management Software – a proprietary operating system for cloud storage solutions known for its speed and security. With cloud sector growth anticipated to remain double-digit in the incoming years, the company is well-positioned to continue along the same path while keeping a 20% net profit margin.

In 2021, NetApp announced several strategic partnerships and product enhancements aimed at improving its cloud-based services, such as the integration of Cloud Volumes ONTAP with Google Cloud’s Anthos, which allows customers to manage and scale applications in multi-cloud environments seamlessly.

The balance sheet is solid (investment-grade BBB+ rating), with more cash than total debt since the total debt has been recently reduced by 10%.

NetApp also pays a stable dividend, with yields far exceeding the industry average. Over the last decade, the dividend has more than tripled, and the company can sustain that growth due to a rather low payout ratio.

Cloud-based CRM tool empowering distributed companies.

Salesforce (CRM) is a cloud-based software company that provides businesses with customer relationship management tools. The company has a broad portfolio of services that store data, monitor leads and progress, forecast opportunities and gain various insights through analytics and relationship intelligence. It also operates Slack – one of the most popular instant messaging platforms for professional and organizational communications.

While sometimes criticized for its costly acquisitions, with Slack, Tableau, and MuleSoft totalling US$50b, it is important to point out that the company has successfully grown all of them – in MuleSoft’s case by 6x in just 4 years.

According to a 3,500-strong customer survey, the company’s products save 25% in IT costs. This meaningful number should enhance the growth potential in the face of global economic turmoil. The company has more cash than the total debt despite engaging in a series of acquisitions. The balance sheet is looking reasonable, with debt growing at a moderate pace.

Arguably, one of the weaker points is notable stock-based compensation with dilutive potential. However, activist investors Elliott Management, Starboard Value, and Third Point have grouped up to execute a management turnaround. These companies have a successful track record of such endeavours, and their actions will likely create meaningful positive changes in the future.

Revolutionising the medical industry with multi-faceted cloud-based solutions.

Veeva Systems Inc. is a global cloud-based software solutions provider for the life sciences industry. The company offers 2 key products – Veeva Commercial Cloud and Veeva Vault.

The former focuses on software, data, and analytics solutions which mainly wall into the customer relationship management (CRM) area, while the latter provides enterprise content and data management applications, as well as research & development functions, project management, and other technical solutions.

Over the last decade, Veeva became a highly entrenched specialized software solutions provider for many large players in the pharma and biotech industry. Meanwhile, the life sciences industry is growing at a stable 5.5% compound annual growth rate, on the way to becoming a US$1.5tn market by 2027.

While Veeva’s growth seems to be decelerating, its retention rates are holding above 100% - meaning that existing customers are increasing their involvement with the company, solidifying its moat even further.

The thesis behind Veeva is simple: by catering to the needs of a specific industry, they’re able to carve out a position of leadership within the space. Particularly given the growing need for healthcare based on ageing populations, Veeva’s alignment with an industry based on providing necessary services will keep customer retention high even through difficult market conditions.

Additionally, Veeva has net profit margins of almost 20% - some of the best in the industry and boasts a flawless balance sheet with 0 debt and over US$3b of cash on hand. So far, the only weakness is the high amount of stock-based compensation since it represented 13% of the revenue in the last year.

Exploring new battery frontiers with developments in Solid State Batteries (SSBs).

Digital Ocean (DOCN) is a cloud-based computing platform specializing in infrastructure and platform tools for small and medium enterprises (SMEs). The company is a niche operator for business clients who find large enterprise-based cloud solutions too complex for their needs.

DOCN’s strength is in a quick and simple implementation, transparent and affordable pricing, and reliant support that guides customers through the process. Besides serving an untapped niche, this approach allows the company to scale alongside its clients. This market is rapidly expanding, with an estimated compounded annual growth rate of 26%.

So far, DOCN has been growing its revenues firmly in double-digits, increasing the average revenue per user by 24% on a yearly basis while also improving the margins. Interestingly, the company has a rather diverse customer base, with the top 25 customers attributing to less than 10% of sales – contributing to revenue resilience in more turbulent periods.

Although not yet profitable, the company has a sufficient cash runway, and it has been steadily increasing its free cash flow margins – up from 6% in 2021 to 13% in 2022, with the forecast for 21-22% in 2023. A lone drawback is a high amount of stock-based compensation, but that approach is not unusual for this type of company.