In this piece, we will take a look at the ten best cloud stocks to buy according to short sellers. Despite the fact that short seller indicator is one of the most useful indicators, it isn’t widely used by investors.
The cloud computing market is one of the fastest growing in the technology industry as the ubiquity of the internet allows business to digitally outsource their functions to reduce investment costs and access specialized services. Estimates show that the cloud computing market was worth $480 billion in 2022, and despite its heft, it is expected to grow at a compounded annual growth rate (CAGR) of 17% to be worth a whopping $2.2 trillion by the end of 2032. The three segments of the cloud computing industry are infrastructure as a service (IaaS), software as a service (SaaS), and platform as a service (PaaS).
READ ALSO 13 Best Tech Stocks to Buy According to Short Sellers and 8 Best EV Stocks According to Short Seller Sentiment
This market, like other mega technology industries, is dominated by mega cap technology companies. As per research from Gartner, the global IaaS market is dominated by five services as of 2023 end. These are AWS, Azure, Google Cloud, Aliyun, and Huawei Cloud. Their market shares are 39%, 23%, 8.2%, 7.9%, and 4.3%, respectively, with all other firms commanding 17.6% of the total market. In terms of revenue, AWS raked in an impressive $54.6 billion in revenue, while the others brought in $32.1 billion, $11.4 billion, $11.1 billion, and $5.9 billion, respectively. AWS’ dominance in the industry is clear as it brought in more than twice the revenue of all other firms that follow Huawei since their cumulative revenue was $24.6 billion.
Apart from the biggest players, whose valuation metrics are different due to their mature and diverse business models, valuing cloud computing stocks is different from how you’d value other companies. For instance, most firms are valued through their price to earnings (P/E) ratio. This measures the premium that investors are willing to pay for a firm’s earnings, but the ratio becomes useless when we try it to value cloud computing stocks. This is because of the industry’s obsession with growth, and its need for high margins, meaning that cloud cloud computing stocks, and particularly SaaS stocks, reinvest large portions of their revenue back into growth.
So much so that one of the most troubled SaaS companies these days has been aggressively investing in growth despite its shares being down 39.65% year to date. This firm ranks 6th on our list of Ray Dalio’s Top 10 Growth Stock Picks with 30+% Revenue Growth, with its second quarter product revenue of $868.8 million marking a 28.9% annual growth. However, this growth clearly hasn’t been enough, as the stock tumbled by 14.7% after the latest earnings report. During the same period, this firm’s marketing and research and development expenses sat at $838.2 million, or 96% of its revenue. This is a classic illustration of the cloud computing industry, and one that requires different valuation metrics than the P/E ratio as these firms are not profitable most of the time.
The two key metrics for valuing SaaS stocks in particular are the EV/Revenue and the Rule of 40. A firm’s enterprise value is its market value plus net debt, and when divided by revenue, the resulting ratio measures the premium that a buyer would be willing to pay for a firm over its ability to generate revenue. The Rule of 40 is simpler, as it simply states that the sum of a SaaS firm’s revenue growth rate and profit margin should exceed 40. While this rule is simply a benchmark and not all inclusive of SaaS performance, it does have some key implications. For instance, it implies that if a firm is growing its revenue at or faster than 40%, then it can be unprofitable.
On the flip side, if growth slows down, to say 10%, then it must be highly profitable with margins of at least 30% to show that the lower growth is accompanied by the benefits of the beefy margins that software companies enjoy. McKinsey also substitutes the profit margin with the free cash flow (FCF) margin to further broaden this rule’s scope. A firm’s FCF simply eliminates the impact of interest, taxes, and capital expenditure on the net income. As per its analysis, the top Rule of 40 SaaS companies are investor favorites. This is because McKinsey’s data shows that in a sample size of 100 SaaS companies, those with the 25 highest Rule of 40 scores had median EV/Revenue multiples of 22. This was nearly 22x the overall sample’s 11x, and nearly 3x the bottom 25 firms’ median EV/Revenue multiples of 8. In other words, investors are typically willing to pay a higher premium over sales for SaaS firms that have either robust revenue growth, superior cost control, or a mix of both.
Finally, while EV/Revenue and Rule of 40 measure the financial validity and stature of these firms, their stock performance is also tightly linked to the economy and monetary policy. A low interest regime means that businesses can spend more money, which is beneficial for SaaS and cloud computing firms, both. On Wall Street, August has marked a paradigm shift after Fed Chair Jerome Powell confirmed that his organization was satisfied with macroeconomic indicators to cut interest rates. This has also impacted valuations, as the median EV/Sales ratio for the top companies, i.e. Rule of 40 firms with a growth rate higher than 30%, sat at 13.3x as of the latest market close. This is the second highest for the year, with the last high being in May when it sat at 16.3x. This was before a brief rate gloom took over Wall Street in July which saw the flagship S&P index lose 8.5% between mid July and early August.
Any discussion of SaaS stocks would be incomplete without a brief discussion of the implications of artificial intelligence. According to hedge fund Coatue Management, SaaS valuations as measured by forward sales are at a historic low right now through a median of 5.5x. This comes with lower growth expectations, as just 1% of SaaS firms are now seeing a median forward growth estimate of 30%+. As for the business model, SaaS firms are seeing a shift from a traditional seat based model that drove revenue from the number of users that were using the services to a consumption driven model. Their lower growth expectations are also somewhat driven by the belief that AI could allow companies to cost effectively create their own code and thereby reduce their reliance on SaaS and cloud computing providers.
With these details in mind, let’s take a look at the best cloud computing stocks to buy according to short sellers.
A closeup of a laboratory technician monitoring a computer for the Cloudbreak platform.
Our Methodology
To make our list of the best cloud stocks to buy according to short sellers, we ranked the holdings of First Trust’s cloud ETF by the percentage of shares outstanding that were sold short. Then, the stocks with the lowest percentage were selected.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Investors in Q2 2024: 107
Short Interest as % of Shares Outstanding: 1.18%
Adobe Inc. (NASDAQ:ADBE) is a productivity focused cloud computing services provider. Its products include image editing, video editing, document reading and analysis, and marketing content creation. This means that Adobe Inc. (NASDAQ:ADBE) stands to benefit from the key opportunity of hefty subscription revenue all the while keeping its costs low due to the software centered nature of is business. Adobe Inc. (NASDAQ:ADBE)’s shares are the late bloomer in the AI world, as they sank by a painful 30% between February and May as Wall Street remained wary of the firm’s ability to generate revenue from artificial intelligence. Since then, the stock has gained 28% after Adobe Inc. (NASDAQ:ADBE) introduced a slew of AI services across its product portfolio. These include its AI image generation tool called Firefly and Acrobat AI Assistant which works with its document reader. Adobe Inc. (NASDAQ:ADBE)’s brand image and market presence provide it with key competitive advantages, and the firm has to maintain its market share by staying ahead in the innovation curve.
Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:
“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
9. Blackbaud, Inc. (NASDAQ:BLKB)
Number of Hedge Fund Investors in Q2 2024: 18
Short Interest as % of Shares Outstanding: 0.99%
Blackbaud, Inc. (NASDAQ:BLKB) is a charity, healthcare, and education focused cloud computing company whose products enable users to manage their grants, tuition, finances, fundraisers, and other associated operating activities. Like other SaaS firms, its business depends on revenue growth and cost control, with the former being particularly important as Blackbaud, Inc. (NASDAQ:BLKB)’s trailing twelve month revenue is $1.1 billion. While Blackbaud, Inc. (NASDAQ:BLKB) is profitable, the firm is currently shaking up its business model. When opposed to enterprise and business centered cloud computing peers, Blackbaud, Inc. (NASDAQ:BLKB)’s revenue is more sensitive to prices due to the the nature of its customers. However, this hasn’t stopped the firm from upgrading its contract model. Blackbaud, Inc. (NASDAQ:BLKB) now requires its customers to use a three year contract with three to five year renewals and annual price hikes. The previous model was a three year contract with annual renewals and no price increase. While the new model stands to grow Blackbaud, Inc. (NASDAQ:BLKB)’s revenue and stretch its recurring revenue, whether its customers choose to stick with it is unknown. Given the specialty nature of its business, it is possible that Blackbaud, Inc. (NASDAQ:BLKB) might retain customers.
Blackbaud, Inc. (NASDAQ:BLKB)’s management shared details for this contract model during the Q2 2024 earnings call:
“We started this program late Q1 of last year. So, we have come up on a good chunk of those initial contracts, where customers may have chosen a one-year versus a multi-year agreement that’s what we were keeping an eye on. The good news is that our renewal rates have fared very well. Overall, our gross dollar retention number, which we now disclose publicly, you can see held steady at 90% for the company. It’s pulled down a little bit by EVERFI, but overall, we held constant at 90% gross dollar renewal year-over-year, which is very positive considering all the efforts on the contractual front.”
8. Workiva Inc. (NYSE:WK)
Number of Hedge Fund Investors in Q2 2024: 19
Short Interest as % of Shares Outstanding: 0.96%
Workiva Inc. (NYSE:WK) is one of the few companies of its kind that allows financial institutions and others to work with SEC filings for data analysis and other purposes. Key to Workiva Inc. (NYSE:WK)’s business model is its product focus on ESG analysis. This creates opportunities and headwinds for the firm. On the former, since it is among the few firms of its kind, Workiva Inc. (NYSE:WK) dominates the market and controls a 70% share. This is key for its cloud model since it allows the firm to generate hefty recurring revenue. It is also planning to grow its free cash flow margin to 22% by 2027, which should help Workiva Inc. (NYSE:WK)’s Rule of 40 reading. However, the firm faces significant risks in case the investment world shifts away from ESG, and Workiva Inc. (NYSE:WK)’s niche nature also means that its sales conversion cycles are longer than the general industry as investors take their time to evaluate its products.
Artisan Partners mentioned Workiva Inc. (NYSE:WK) in its Q1 2024 investor letter. Here is what the firm said:
“Our profit cycle thesis is based on the company’s capability to identify and quickly roll out new products, effort to expand beyond North America and opportunity to benefit from increasing ESG regulatory reporting longer term. While the company reported financial results that exceeded expectations, shares declined due to disappointing forward guidance. However, we remain invested on the belief that trends are supportive of multiyear growth.”
7. Atlassian Corporation (NASDAQ:TEAM)
Number of Hedge Fund Investors in Q2 2024: 47
Short Interest as % of Shares Outstanding: 0.91%
Atlassian Corporation (NASDAQ:TEAM) is a large and diversified cloud computing company. Its products include the Jira project management software, Bitbucket, which is a coding collaboration tool, and others that range from administration to communication. The premium placed on cloud computing firms to deliver accelerated growth has also meant that Atlassian Corporation (NASDAQ:TEAM)’s shares have struggled in 2024. The stock is down 26% year to date, with key reasons behind the drop being investors’ concerns of a longer than expected customer migration to Atlassian Corporation (NASDAQ:TEAM)’s cloud platform from the sunset server platform, and its inability to control costs as evidenced by an expected non adjusted EBITDA margin of -6% for fiscal year 2025. Given that growth and cost control are key tenets of cloud valuation, Atlassian Corporation (NASDAQ:TEAM)’s share performance is unsurprising.
Artisan Partners mentioned Atlassian Corporation (NASDAQ:TEAM) in its Q1 2024 investor letter. Here is what the fund said:
“Among our top detractors were Atlassian, ON Semiconductor and Exact Sciences. Atlassian’s earnings results met expectations for cloud revenue growth. However, this was insufficient for investors to support the stock’s momentum after strong recent performance. While parts of its cloud business, such as enterprise, are exceeding expectations, there are signs of weakness among small- and medium- sized companies, where pressures persist in paid seat expansions. We trimmed the position due to valuation concerns; however, we remain bullish in the longer term and are building conviction around its ability to leverage generative AI to drive accelerated cloud revenue growth.”
6. Arista Networks, Inc. (NYSE:ANET)
Number of Hedge Fund Investors in Q2 2024: 65
Short Interest as % of Shares Outstanding: 0.83%
Arista Networks, Inc. (NYSE:ANET) operates on the hardware side of the cloud computing industry. It sells products such as routing systems and switches, and the firm also offers its own software products. While the software and end use phases of the artificial intelligence stack might take longer to generate revenue, the hardware side is seeing booming demand as evidenced by NVIDIA’s share price. This has also translated into robust share price performance for Arista Networks, Inc. (NYSE:ANET), as the stock is up 86% over the past 12 months. Another key advantage that Arista Networks, Inc. (NYSE:ANET) has enjoyed over other hardware firms is its operating system that manages data centers and other systems. This works in tandem with its network switches, and Arista Networks, Inc. (NYSE:ANET) enjoys a considerable presence in the ethernet market. However, the firm is facing competition from AI giant NVIDIA for its ethernet and Infiniband products, and as its software is tailored to non AI use cases, Arista Networks, Inc. (NYSE:ANET) remains vulnerable to a competitor taking its share in the AI market.
Artisan Partners mentioned Arista Networks, Inc. (NYSE:ANET) in its Q2 2024 investor letter. Here is what the fund said:
“Arista Networks is the market leader in cloud networking equipment used in data centers. Shares have experienced strong outperformance since the beginning of 2023 due to its ethernet options being well positioned to capture market share in AI cloud environments (more scalable and cheaper than InfiniBand, an out-of-the-box solution by Nvidia). Similar to Chipotle, after a period of strong performance, we trimmed the position based on valuation and market cap.”
5. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Investors in Q2 2024: 308
Short Interest as % of Shares Outstanding: 0.77%
Amazon.com, Inc. (NASDAQ:AMZN) is a technology focused firm known for its strong presence in the cloud computing and the eCommerce industries. More than 80% of its revenue is from eCommerce, which means that the typical drivers of eCommerce valuation are also relevant for the company. These include reducing delivery times and growing its premium membership services. Additionally, Amazon.com, Inc. (NASDAQ:AMZN) is also the world’s biggest cloud computing company in terms of market share. As per Gartner, the firm controls 39% of the cloud market through its AWS business division. This introduces a high margin revenue stream for Amazon.com, Inc. (NASDAQ:AMZN). AWS has an operating margin of 24% as per Amazon.com, Inc. (NASDAQ:AMZN)’s latest financial results, which is 20 percentage points higher than its North American eCommerce operations’ margin of 3.8% and the overall margin of 5.7%. Through AWS and its broader technology focus, the firm is also concentrating on all three layers of the AI stack. Amazon.com, Inc. (NASDAQ:AMZN) benefits from its access to the Claude AI foundational model too, and its eCommerce market share provides it with a wide moat.
Patient Capital mentioned Amazon.com, Inc. (NASDAQ:AMZN) in its Q2 2024 investor letter. Here is what the fund said:
“Amazon.com Inc. (AMZN) moved higher throughout the second quarter as AI demand helped to reaccelerate growth in their AWS business. It looks as though the cloud business is finally past the customer cost optimization period with customers restarting their cloud migrations as well as expanding spend on AI projects. Despite the top and bottom-line improvement seen in the first quarter, the company is significantly underearning its long-term potential as it continues to reinvest aggressively in the business. With 80% of global retail sales still being done in physical stores and 85% of global IT spending still on-premises, we see a long-run way for the dominant player in the cloud, retail, and increasingly logistics and advertising space.”
4. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Investors in Q2 2024: 279
Short Interest as % of Shares Outstanding: 0.74%
Microsoft Corporation (NASDAQ:MSFT) is the second largest cloud computing company in the world in terms of market share. It commands 23% of the market, and as opposed to Amazon, Microsoft Corporation (NASDAQ:MSFT) also benefits from the fact that it is a software centered firm through its Windows OS that powers most of the world’s computers. This offers Microsoft Corporation (NASDAQ:MSFT) significant advantages in software development, and it has leveraged these on the cloud front through Copilot. Copilot is Microsoft Corporation (NASDAQ:MSFT)’s AI assistant that enables users to conduct a variety of tasks, including programming. This stands to upend the cloud computing business, and particularly the SaaS front as companies might start developing their own software cost effectively to significantly reduce the market for SaaS products. Microsoft Corporation (NASDAQ:MSFT)’s Azure also offers it a wide customer base to target its AI products, which enables it to capitalize on the hype through an existing customer network as opposed to landing new deals. At the same time, the pressure on Microsoft Corporation (NASDAQ:MSFT) to deliver revenue growth and maintain Azure’s momentum is high, as shown during its latest earnings when the shares dropped by 8% after it shared that Azure growth had slowed down by a mere two percentage points to 29%.
Microsoft Corporation (NASDAQ:MSFT) chief Satya Nadella shared key details for Copilot and SaaS deals during the Q4 2024 earnings call:
“So to me, look, at the end of the day, GenAI is just software. So it is really translating into fundamentally growth on what has been our M365 SaaS offering with a newer offering that is the Copilot SaaS offering, which today is on a growth rate that’s faster than any other previous generation of software we launched as a suite in M365. That’s, I think, the best way to describe it. I mean the numbers I think we shared even this quarter are indicative of this, Mark. So if you look at it, we have both the landing of the seats itself quarter-over-quarter that is growing 60%, right? That’s a pretty good healthy sign. The most healthy sign for me is the fact that customers are coming back there.
That is the same customers with whom we landed the seats coming back and buying more seats. And then the number of customers with 10,000-plus seats doubled, right? It’s 2x quarter-over-quarter. That, to me, is a healthy SaaS core business. And on top of that, some of the things that Amy shared around Dynamic. That’s another exciting place for us, which is one, we are gaining share. We are – Dynamics with the GenAI built-in is sort of really biz app, it’s probably the category that gets completely transformed with GenAI. Contact centers being a great example. We ourselves are on course to save hundreds of millions of dollars in our own customer support and contact center operations. I think we can drive that value to our customers. And then on the Azure side, you see the numbers very clearly.
In fact, I think last quarter is when we started giving you that. You saw an acceleration of that this quarter. One of the other pieces, Mark, is AI doesn’t sit on its own, right? So it’s just for – we have a concept of design wins in Azure. So in fact, 50% of the folks who are using Azure AI are also using a data meter. That’s very exciting to us because the most important thing in Azure is to win workloads in the enterprise. And that is starting to happen. And these are generational things once they get going with you. So that’s, I think, how we think about it at least when I look at what’s happening on our demand side.”
3. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Investors in Q2 2024: 93
Short Interest as % of Shares Outstanding: 0.68%
Oracle Corporation (NYSE:ORCL) is one of the biggest enterprise software providers in the world. This also makes it a key cloud computing firm, particularly due to its enterprise resource management software, programming language, and database products. All of Oracle Corporation (NYSE:ORCL)’s products are software, and it has also established a key role in the AI industry through providing infrastructure as a service (IaaS). A multitude of firms, including Tesla and OpenAI, have either used or are using Oracle Corporation (NYSE:ORCL) owned NVIDIA GPU clusters which provide it a key competitive edge due to the tight supply of the latest chips. The firm is also undergoing a key shift these days by migrating its database customers to the cloud via deals with Microsoft, Amazon, and Google. This creates an opportunity for sizeable support revenues for Oracle Corporation (NYSE:ORCL), which is a high margin income stream that adds to a bullish hypothesis. The firm’s IaaS business, called Oracle Cloud Infrastructure (OCI) has injected fresh and fast growth into its business, especially for the deals that Oracle Corporation (NYSE:ORCL) has signed but not recognized revenue from.
Oracle Corporation (NYSE:ORCL)’s billionaire founder Larry Ellison shared key facts for these deal RPOs (remaining performance obligations) during the Q4 2024 earnings call:
“Thank you, Safra. I’m going to start by repeating something Safra said. In Q4, Oracle’s company-wide RPO increased 44% to $98 billion. In AI alone, we signed contracts with 30 different customers for $12.5 billion in new AI business. These astonishing RPO numbers 44% and $98 billion were driven by massive increases in sales of Oracle Cloud Infrastructure, OCI. So who are the companies choosing to use Oracle Cloud Services and Oracle data centers. Well, here are a few names: NVIDIA, Microsoft, Google, X AI, Open AI, coherent dozens more. In other words, the world’s largest cloud companies and the world’s most successful and accomplished AI companies choose to use Oracle cloud services and data centers. So can — so why are they working with Oracle, because Oracle’s Gen 2 cloud infrastructure is different.
OCI’s area network moves data much faster. And when you charge by the minute, faster also means less expensive. OCI trains large language models several times faster and at a fraction of the cost of other clouds. OCI’s Critical cloud software, the operating system and the database are fully Autonomous. At OCI, human beings do not run the operating system or the database, Autonomous software robots do. No one else has this level of autonomy in the cloud. Eliminating human labor eliminate human error. Almost all cloud security breaches begin with human error, eliminating the possibility of human error is the only way to make certain your cloud data is not stolen. That’s it. The most important technology companies in the world are using OCI because it’s faster, less expensive and more secure.”
2. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Investors in Q2 2024: 216
Short Interest as % of Shares Outstanding: 0.56%
Alphabet Inc. (NASDAQ:GOOGL) is the mega cap technology giant whose business is fueled by its search engine. Google’s Search is the world’s largest platform of its kind, and it enables the firm to monetize its traffic to allow businesses to publish advertisements directly on Search and on web properties that have chosen to work with it. Search’s size, as evident by its processing of 5.9 million queries per minute provides Alphabet Inc. (NASDAQ:GOOGL) with a wide competitive moat that is the industry’s envy. Additionally, its tech driven focus makes it the third biggest cloud company in the world by market share. Alphabet Inc. (NASDAQ:GOOGL)’s Google Cloud business allows those unwilling to invest in infrastructure to use its hardware for their AI processing. This includes Apple, whose Apple Intelligence is trained on Google Cloud through Google’s tensor processing units (TPUs) and leaving NVIDIA out of the equation. However, 2024 has seen threats linger on the horizon for Alphabet Inc. (NASDAQ:GOOGL), in the form of purported anti trust action by the government and AI powered search platforms.
Patient Capital Management mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q2 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (GOOGL) was a top contributor in the second quarter, finally catching up to its peers in the Magnificent 7. The company gained 20.8% in the period following strong first quarter earnings, a new $70B repurchase program (3% of shares outstanding) and the initiation of a cash dividend ($0.20 per share; 0.42% yield). We continue to believe the market underappreciates Google’s exposure to AI with its Gemini model being integrated into search results, YouTube advertising and its cloud offering. We continue to think that the cloud players will be the AI winners in the long-term, with Google being well positioned to take advantage. While the company trades at 24x 2024 earnings, if you remove the money-losing and under-earning businesses, you realize that you are paying below a market multiple for the core Google business. We do not believe there are many other AI winners trading at such an attractive multiple.”
1. SAP SE (NYSE:SAP)
Number of Hedge Fund Investors in Q2 2024: 31
Short Interest as % of Shares Outstanding: 0.15%
SAP SE (NYSE:SAP) is one of the biggest enterprise software providers in the world, with its product use cases ranging from resource management to financial management, human resources, and business collaboration. This provides it with a wide moat in the industry, as evidenced by its 24% market share of the ERP market according to Gartner. This makes SAP SE (NYSE:SAP) the biggest player in its industry by market share, and its dominance has translated into resilience in an overall slow time for the cloud industry. As evidenced by SAP SE (NYSE:SAP)’s second quarter results, its cloud backlog grew by 28% annually while its ERP revenue jumped by 33%. The firm’s shares have responded accordingly, and are up by 46% year to date. Within its broader cloud portfolio, SAP SE (NYSE:SAP) is currently making the shift from providing perpetual licenses to a subscription, SaaS based model. This spreads out its customer spending over a longer time period, and could lead the firm to post consistent revenue growth in the future. It could also help SAP SE (NYSE:SAP) grow its market share as customers try out services initially, and add recurring revenue to the business.
When asked during the Q2 2024 earnings call about the reasons behind it being immune to macroeconomic headwinds, here’s how SAP SE (NYSE:SAP)’s management replied:
“I mean, Mark, indeed, I mean, we have seen a fantastic performance in half year 1, and now entering half year 2, we see very healthy pipeline. And pipeline means sales pipeline but also I see a very strong innovation pipeline.
Now when you sit together with our product owners and see what we are delivering on GenAI use cases and the customers who are sharing their feedback early on, it’s pretty exciting. I mean they see a ton of value, and you have seen now in Q2 already the first impact of Business AI on our numbers.
And then second, what I also see clearly working now is the best of suite. I mean 4 years back, we were rightfully criticized for having a bunch of best-of-breed solutions. But when you want to have a high-quality AI, when you want to steer your business end to end, when you want to connect your commerce and your omnichannel with supply chain and when you want to connect your procurement with the warehousing, I mean, that all comes together on BTP.
And I would say we are also just at the beginning. I mean please don’t forget, when customers are using their ECC solution, so their on-premise monolithic ERP solution today, that doesn’t mean that they use all the modules in the past. And now with our land-and-expand strategy, we have really, I mean, a motion that customers are really landing. And then they get that they have to connect the different parts of their company and the different parts of the supply chain. And that’s why we also stay confident for the second half of the year.”
SAP is the cloud stock that short sellers are avoiding like the plague. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SAP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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