In many ways, 2021 has seen a reversal of many of the trends which dominated 2020. This is certainly true for cloud computing stocks, which have seen a big correction in the last few weeks. For instance, the Wisdom Tree Cloud Computing Fund (WCLD – Get Rating) is down 22% since mid-February.
There are a few reasons for this weakness:
- Interest rates are rising due to expectations of strong economic growth in the second half of the year as the economy reopens. This tends to put pressure on high-multiple stocks. The price to sales (PS) ratio for the cloud sector is 6.2, while it’s around 1.5 for the S&P 500.
- Many of these stocks experienced huge surges in growth in 2020 due to the coronavirus as companies were forced to increase spending on cloud computing. Thus, many companies are now facing elevated year-over-year comps. Of course, many growth investors will tend to dump high-multiple stocks at the first sign of any deceleration in revenue.
- Improving economic conditions has led to a rotation into sectors that will benefit from these conditions such as financials, energy, and materials, while the sectors that won’t be affected have experienced selling pressure.
Time to Buy?
During this recent correction, most cloud stocks have experienced a significant pullback. Yet, the one exception is cloud storage stocks. The same factors that are negatives for the overall sector are positives for this group.
Cloud storage stocks are more connected to small business spending which is likely to be quite strong in 2021 and 2022 as the economy returns to baseline levels. Further, they have much lower valuations than their peers, so they are likely to benefit from continued strength in value stocks.
DBX provides cloud storage solutions and file-sharing services to more than 600 million registered users across 180 countries. Its ancillary features include Dropbox paper, Dropbox showcase, and Dropbox smart sync, which allow users to create, access, organize, share, collaborate, and secure content.
The company has been long rumored as an acquisition target for enterprise software or cloud company was given the obvious synergies and DBX’s attractive valuation. DBX has a forward PE of 18 which is well below the average for tech companies and the broader market. It’s also expected to grow revenues next year by 13% and users by 9%.
DBX’s revenues have increased at a CAGR of 21.3% over the past three years, and its margins have improved as well. DBX’s strong fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
The stock has an overall rating of B, which equates to Buy in our proprietary rating system. DBX has a grade of A for Growth and a B for Momentum and Quality. In the 81-stock Technology – Services Industry, it is ranked #9.
In total, we rate DBX on eight different levels. Beyond what we stated above, we also have given DBX grades for Stability, Industry, and Sentiment. Get all DBX’s ratings here.
BOX has been a strong performer over the past year as the pandemic led to a surge in demand for the company’s products. Unlike most cloud stocks, BOX’s earnings and revenue growth outpaced its gains.
Thus, the stock remains attractive on a valuation basis with a forward PE of 23 which is significantly below its peers in the sector and…
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