As someone who works remotely and creates a significant amount of content using Google Drive, I’m reminded daily about the importance of the cloud, cloud storage, and cloud storage stocks.
After my first sentence, you would think that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would be at the top of any list I assemble regarding the best cloud storage stocks to buy. And it probably will be.
However, before I do so, I need to find more names of companies making a difference in cloud storage. Note that the emphasis is on cloud storage, not other aspects of the cloud ecosystem.
There are several cloud computing ETFs available that can help with the selection of cloud storage stocks. The only downside is that many of the businesses in these ETFs don’t emphasize cloud storage, and that’s what we’re after.
Despite this negative, I’ll pull my three cloud storage stocks to buy from the First Trust Cloud Computing ETF (NASDAQ:SKYY), the largest of the cloud computing ETFs with $2.7 billion in net assets. Not surprisingly, Alphabet makes the top 10 holdings in seventh position.
Alphabet (GOOG, GOOGL)
While Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are excellent companies, I have a different connection with them regarding cloud storage than I do with Google and Alphabet. So, it makes my list.
As I went through several 10-K’s to determine a cloud computing company’s activities in cloud storage, I realized that Google makes money from me in many ways, not just from the cloud storage I use.
Excluding YouTube ads, its Other Bets, and hedging gains, Alphabet’s Google business accounted for 89% of its 2022 revenue of $282.8 billion. However, if you include YouTube ads in the Google revenue, the percentage increases to a tad shy of 99%, or $279.8 billion.
Alphabet divides Google into Google Services (91% of Google revenue) and Google Cloud (9%). I use both.
For Google Services, I use Chrome most of the time — it’s terrible with SEC documents for some reason, so I’ll use Opera for that — I jump between Google and Apple Maps, Google’s search engine, YouTube, Gmail, and Google Drive.
For Google Cloud, I’ve been using Google Workspace, a paid version of Google Drive with collaboration and conferencing capabilities and a few other things added in for good measure. As a freelancer, it’s a very reasonable price for complete mobility.
There is no question that Google Services is what drives the Alphabet bus. In 2022, its operating margin was 34.2%, 440 basis points higher than Apple’s (NASDAQ:AAPL) most recent fiscal year.
In 2023, Google Cloud will generate a positive operating profit. For the nine months ending September 30, it was $852 million on $23.9 billion in revenue, suggesting the best days for Alphabet remain on the horizon.
Dropbox (DBX)
Thanks to its performance in 2023, it’s up 24% year-to-date, Dropbox (NASDAQ:DBX) stock is once more trading above its March 2018 IPO price of $21. It went public with such fanfare and potential.
“The company sold 36 million shares, and a source told CNBC that the offering was 25 times oversubscribed. Dropbox, which raised $756 million in the largest tech IPO since Snap last year, will trade on the Nasdaq under the ticker ‘DBX,’” CNBC wrote in 2018.
It never seemed to live up to the expectations. But a cloud storage company it is.
On Nov. 17, Dropbox announced it was collaborating with Nvidia (NASDAQ:NVDA) to help millions of its Dropbox customers use generative AI to improve workflows across their cloud content.
“AI has the potential to offload routine tasks, unlock our creativity, and help us do more meaningful work. We’re excited to partner with NVIDIA and leverage their technology in new ways to deliver more personalized, AI-powered experiences to our customers,” stated Drew Houston, Dropbox CEO and co-founder.
Dropbox’s biggest growth opportunity is to increase the number of paying users. Although it has more than 700 million registered users, only 18.2 million are paying customers. AI could be the solution.
Let’s say it converted 10% of its registered users to Dropbox’s Essentials plan — 312 Canadian dollars ($228) billed yearly — that’s nearly $16 billion in annual revenue [700M * 10% * $228], or about 7x its 2022 revenue of $2.33 billion.
So far, in 2023, it is making inroads.
In Q3 2023, it had 18.17 million paying users, 3.5% higher than a year earlier, with an average revenue per paying user of $138.71, 3.3% higher than Q3 2022.
Will AI move the needle for Dropbox? It could be.
Shopify (SHOP)
While Shopify (NYSE:SHOP) doesn’t qualify as a pure-play cloud storage company, the e-commerce platform owes its livelihood to Google Cloud. Because of this cloud infrastructure, the company’s software provides merchants of all sizes with the tools to run their online businesses globally.
Earlier this year, Shopify announced an enhanced relationship with Google that would see it use Google’s Discovery AI solutions for its enterprise customers.
“We know that 69% of consumers in the US alone say a store’s search is the most common way they shop, but only around 10% are getting consistently accurate search results. It’s a massive problem that we’re excited to help enterprise retailers solve through our continued work with Google,” stated Shopify President Harley Finkelstein.
How big a problem is search abandonment? A Google-commissioned Harris Poll survey suggests the loss of orders through poor search costs merchants an estimated $2 trillion annually. That’s bigger than Alphabet’s market capitalization. ‘
In early November, Shopify reported Q3 2023 results. They included revenue of $1.71 billion in the quarter, $40 million higher than the analyst estimate. On the bottom line, it earned 24 cents a share, 10 cents higher than the consensus.
More importantly, its guidance for the fourth quarter and the entire year were very positive. It expects revenue growth in 2023 to be in the mid-twenties on a percentage basis over 2022, with high-teens revenue growth in the fourth quarter.
Shopify stock gained 22% on the news. It’s up another 19% since.
With free cash flow reaching 16% of revenue in the third quarter, its financial performance will continue to drive its shares higher in 2024.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
