2 Cloud Stocks to Buy Now
There's no question that technology companies will continue to lead the market. As profits grow, the major indexes soar.
The cloud is the new growth area. As the concept is fully embraced, software companies will be the primary drivers of that transition — except they are not all the same. Some are better positioned than others to generate high-margin businesses that produce the type of growth Wall Street craves.
Here are two names to consider in 2013.
In its most recent quarter, Oracle posted $8.2 billion in revenue. Net income arrived at $2 billion, or 41 cents per share — representing a year-over-year profit increase of 11 percent. On a non-GAAP basis, the company produced $3.6 billion in operating income, which was 6 percent higher year over year. This was helped by the company's 2 percent improvement in operating margin, which arrived at 44 percent.
Likewise, software licenses as well as cloud subscription revenue grew 11 percent to $1.6 billion. As a sign of how well the company's model is working, Oracle continues to generate tons of cash, while consistently managing its expenses.
Although competition from the likes of International Business Machines and SAP certainly exists, Oracle has been able grow its cloud products such as Exadata, Exalogic, and Exalytics by 100 percent during the quarter. These will be the major drivers of the company's growth for many years to come.
Salesforce.com: Price target $200
The popular bear argument against Salesforce.com continues to be its valuation. Admittedly, I have raised this same concern.
However, after the company's most recent quarter I was forced to become a believer. Although its lack of profitability continues to be a sore spot, for now its strong growth is too much to ignore.
Salesforce.com had a record quarter, during which the company posted 35 percent revenue growth reaching $788 million, or 33 cents per share. The performance was helped by better than expected showing in the company's services support and subscription business, which grew 35 percent year over year.
Equally impressive was the company's 20 percent year-over-year growth in operating income, which surged 20 percent. The company continues to grow various business segments such as professional services at an annual rate of over 30 percent, all of which contributed to an 18 percent jump in operating income. But the company said the best is yet to come, projecting guidance of $4 billion in revenue.
That stock should be bought on that basis alone. Aside from 35 percent revenue growth, management is showing incredible confidence in the company's business. Executives don't go out of their way to apply pressure on themselves if they don't really believe the goal is realistic. What it says is that "we have this thing figured out."
Impressively, despite its high forward price-to-earnings ratio of 85, the company continues to prove not only that it can grow into its valuation, but it's willing to raise the bar in the process.
Perhaps the bear concerns about profits just might be overblown — at least for now. The stock should reach $200 by the second half of 2013.
—By TheStreet.com Contributor Richard Saintvilus
At the time of publication, Richard Saintvilus held no position in any of the stocks mentioned.