Trading Nation

One cloud computing stock deserves a second look into earnings, Piper Sandler says

Share

The cloud computing stocks will get a chance in the spotlight this week. 

Salesforce, Palo Alto Networks, Box, Splunk and Workday are all set to report earnings in coming days. 

Palo Alto stands out from the pack, says Craig Johnson, chief market technician at Piper Sandler. 

"The stars and moon are aligned here," Johnson told CNBC's "Trading Nation" on Friday. "On the chart, this looks like one of those inverted head-and-shoulder bottoms from a technical perspective. You've got a neckline at $250. We've broken out and started another leg higher."

An inverted head-and-shoulder pattern forms when a stock makes a low, a lower low and then a higher low. It suggests the reversal of a downward trend that should generate more upward momentum. 

Loop Capital Markets initiated coverage of the software company on Friday with a buy rating and initiated peers Workday and Salesforce with sell ratings. The firm said Palo Alto's exposure to cloud-based security gave it an advantage. 

"From a fundamental perspective, [we] certainly like the upgrade from Loop today but got to really give the hat tip to Rob Owens here at Piper Sandler who upgraded the stock on March 22 with a $280 target," Johnson said. "So, good-looking stock, breaking out, I'd be buying the breakout here at Palo Alto ahead of the quarter."

Palo Alto is set to report earnings Monday afternoon. Analysts surveyed by FactSet anticipate earnings to dip 8%, but revenue to climb by nearly 15%. Shares closed Friday at $269.33. 

Steve Chiavarone, portfolio manager at Federated Hermes, sees several tailwinds for the entire cloud space that keeps him bullish on the group.

"The Bureau of Economic Analysis showed that for the first time ever, the percentage of business spending on digital investments like software and R&D has eclipsed physical investments in a trend that's been taking place for the better part of five years but really kind of took hold in the first quarter of this year with the pandemic," Chiavarone said during the same "Trading Nation" segment. 

He expects cloud companies focused on infrastructure software, remote work, security and digital commerce to outperform. 

"The pricing model here is also a plus. A lot of these companies offer subscription models, which are stable relative to having to acquire new customers," he added. "And so for those reasons, plus the fact that these companies are generating a ton of cash flow, we think the cloud space still makes a lot of sense."

The SKYY cloud computing ETF is up nearly 30% this year, slightly outperforming the broader XLK technology ETF. It has risen 74% since its March low. 

Disclaimer