Cloud computing has been one of the most disruptive technological shifts of the past decade. As companies continue migrating more workloads to the cloud, some of the top cloud infrastructure and platform providers have seen tremendous growth. I believe cloud stocks still have legs for the 2020s, fueled by emerging technologies like artificial intelligence.
Just look at the eye-popping demo of OpenAI’s new Sora video generator model if you want proof. We’re entering an age where AI can create photorealistic videos from simple text prompts. As these generative AI models become commercially viable in the cloud, they could enable new use cases we can’t even imagine yet. As a result, more investor cash may pour into the AI industry, which would provide tailwinds for leading cloud providers powering these models.
Even without AI, growth remains strong, with global cloud spending expected to grow at 15-20% annually this decade. Companies’ reliance on cloud infrastructure expands as they embrace data-intensive digital transformation initiatives. This sets up some cloud stocks to potentially deliver multibagger returns over the next few years. Let’s take a look!
Alibaba (BABA)
Alibaba (NYSE:BABA) is the Chinese e-commerce juggernaut, but it also provides cloud services through Alibaba Cloud. Offerings include ClusterOps for cloud-native environment management and Elasticsearch for search and analytics. BABA stock has struggled amid a weak Chinese market and economic uncertainty, but I believe the bleeding has stopped. Business execution remains solid, the Chinese economy may be nearing a bottom and valuations look highly attractive.
In its recent quarter, Alibaba generated $36.7 billion in revenue, up 5% annually. Not wildly impressive growth, but BABA trades at just 8x earnings and 1.4x sales — it seems deeply undervalued, given expectations for continued mid-single-digit top-line expansion and strong profitability. Sentiment has sunk, but I expect a strong rebound once negativity around China dissipates.
As Alibaba reported, all six business segments saw increasing revenue, with four segments remaining profitable. China faces economic headwinds, but we may be approaching a bottom. With its intrinsic value far surpassing its deflated stock price, Alibaba looks like one of the most compelling cloud stocks today. If sentiment improves even slightly, the stock could stage a powerful recovery.
DocuSign (DOCU)
While many view DocuSign (NASDAQ:DOCU) as a “pandemic darling,” its Agreement Cloud platform has staying power. The suite includes 12+ apps and APIs for e-signatures, document generation, contract lifecycle management and more. Despite trading 23% below pre-pandemic highs, DOCU has $1.6 billion in cash versus $835 million in debt – a strong financial position.
Yes, slowing revenue growth is a valid concern. However, I expect reacceleration once e-signatures become more commonplace. Fortune Business Insights report projects a 35% CAGR for the global digital signature market through 2030, valuing it at $43 billion. As businesses continue adopting modern agreement solutions, DocuSign stands ready to capitalize, given its #1 market share position globally.
As its CEO noted in its Q3 earnings call:
“…our Q3 non-GAAP operating margin came in at 27%, a 400 basis point increase versus prior year and non-GAAP operating income grew 27% year-over-year to $187 million. We also generated record free cash flow in Q3 coming in at $240 million, up significantly versus the prior year. We’re focused on strengthening our profitability while making balanced investments in areas with strong long-term growth opportunities.”
This is solid growth among cloud stocks, and that gives me a lot of conviction.
Adobe (ADBE)
Adobe (NASDAQ:ADBE) stock has done well recently amid AI hype — the company has infused offerings like Photoshop with new AI capabilities. However, shares sank last week on OpenAI’s video-generation model announcement. I view the sell-off as irrational and another buying opportunity.
Rather than threaten Adobe, I believe OpenAI’s innovations will prove complementary. The firms have partnered previously, and Adobe could utilize models like Sora to enhance its own editing software. Combined with After Effects, for example, Sora could enable breakthrough video creation tools.
Financially, Adobe saw Q4 revenue climb 11.6% to $5 billion as net income surged 26.1% to nearly $1.5 billion. Yes, the business trades at a premium — but for good reason. Over 94% of revenue comes via sticky subscriptions, the company holds deep competitive moats and TAM remains enormous across creative, document and marketing software.
Sustained double-digit growth could justify a premium valuation. Adobe operates in a recession-resistant industry. Even with slowing expansion over time, I see a visible path for the stock to deliver multibagger returns over the long run. Upside drivers include continued cloud migration, operating leverage and emerging technologies like AI/ML.
On the date of publication, Omor Ibne Ehsan did not hold (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.
