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March 7, 2019, 3:28 p.m. EST

15 stocks for investors who want to profit from strong growth in cloud computing

These cloud companies are growing sales rapidly while increasing prices

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By Philip van Doorn, MarketWatch


Okta, Inc.
Okta shares are up 26% this year.

It seems that almost every company in the information-technology-services world now calls itself a “cloud” company — and they should.

Collaborating remotely is now the way of the world. And there has been an explosion in profits of companies providing such services.

Still, in any industry there are winners and losers. A good way to find the winners is searching for companies that are boosting sales rapidly while maintaining pricing power.

Starting with the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.95%  and the S&P 1500 Composite Index (made up of the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.60% , the S&P 400 Mid-Cap Index /zigman2/quotes/210599897/delayed MID -1.08%  and the S&P Small-Cap 600 Index /zigman2/quotes/210599868/delayed SML -0.07% ), we looked at companies in the information-technology services, internet software/services and packaged-software industries, as defined by FactSet, which provided the data. We then narrowed the list to U.S. companies with market capitalizations that exceed $1 billion.

This left us with 99 companies. Among this group, 15 companies have increased their quarterly sales by at least 20%, while also expanding their gross profit margins. A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It is an indication of pricing power. A narrowing margin might mean a company has been using heavy discounting to defend its market share or as part of a push to increase sales, which cannot be sustained.

The combination of rapidly increasing sales and good pricing power could provide the basis for your own research. Before considering an investment, you should take a careful look and consider whether a company’s strategy will enable it to remain competitive over the next several years.

This data screen excluded some well-known cloud players, such as Microsoft /zigman2/quotes/207732364/composite MSFT -1.57% , which increased fourth-quarter sales by 12% form a year earlier, while improving its gross margin to 61.64% from 61.18%. It also excluded Amazon.com /zigman2/quotes/210331248/composite AMZN -0.72% , which is categorized by FactSet as a an internet-retail company. Amazon Web Services increased fourth-quarter sales by 45% to $7.43 billion. However, this represented only 10% of the company’s total sales.

Here’s the list, sorted by increases in quarterly sales:

Company Ticker Increase in quarterly sales from a year earlier Quarterly gross margin Quarterly gross margin - year earlier Total return - 2019 through March 6
Zscaler Inc. /zigman2/quotes/203585803/composite ZS 65% 93.51% 80.70% 47%
Okta Inc. Class A /zigman2/quotes/210420951/composite OKTA 58% 66.80% 62.60% 26%
Splunk Inc. /zigman2/quotes/203060494/composite SPLK 48% 84.93% 82.32% 20%
Pluralsight Inc. Class A /zigman2/quotes/201577487/composite PS 42% 75.29% 69.25% 31%
Ansys Inc. /zigman2/quotes/207638775/composite ANSS 37% 89.54% 85.35% 25%
ForeScout Technologies Inc. /zigman2/quotes/205654246/composite FSCT 35% 79.36% 74.45% 62%
Autodesk Inc. /zigman2/quotes/209828392/composite ADSK 33% 90.22% 85.90% 20%
Aspen Technology Inc. /zigman2/quotes/201282485/composite AZPN 33% 89.50% 88.54% 20%
AppFolio Inc. Class A /zigman2/quotes/209340958/composite APPF 33% 52.91% 52.80% 15%
Five9 Inc. /zigman2/quotes/209043265/composite FIVN 31% 59.84% 58.81% 19%
ANGI Homeservices Inc. Class A /zigman2/quotes/209149959/composite ANGI 25% 87.78% 85.26% 2%
Paylocity Holding Corp. /zigman2/quotes/206986696/composite PCTY 25% 64.49% 57.16% 38%
CoStar Group Inc. /zigman2/quotes/208228061/composite CSGP 24% 75.86% 75.46% 38%
RealPage Inc. /zigman2/quotes/207438378/composite RP   21% 51.02% 45.50% 22%
Virtusa Corp. /zigman2/quotes/205784302/composite VRTU 20% 30.00% 29.31% 17%
Source: FactSet

You can click on the companies for more information, including price ratios, other financials and news coverage.

As you can see, these stocks have been on fire this year. That may not be a surprise, considering that the technology-heavy Nasdaq was up 9.5% for 2019 through March 5. It will be interesting to see whether analysts are being overly conservative in their expectations for these companies. This is a phenomenon recently described by Raife Giovinazzo, the portfolio manager of the Fuller & Thaler Behavioral Small-Cap Equity Fund /zigman2/quotes/206849619/realtime FTHSX +0.20%   /zigman2/quotes/210159846/realtime FTHNX +0.20% .

The numbers for all these companies are for fiscal quarters ended Dec. 31 or later, except for Okta , whose numbers are for the quarter ended Oct. 31. Okta is scheduled to announce its results for the quarter ended Jan. 31 on March 7 after the stock market closes.

Here’s a summary of analysts’ opinions about these companies:

Company Ticker Share 'buy' ratings Share neutral ratings Share 'sell' ratings Total number of ratings
Zscaler Inc.   44% 44% 12% 16
Okta Inc. Class A   63% 37% 0% 19
Splunk Inc.   79% 18% 3% 39
Pluralsight Inc. Class A 100% 0% 0% 8
Ansys Inc. 44% 39% 17% 18
ForeScout Technologies Inc. 92% 8% 0% 12
Autodesk Inc. 69% 19% 12% 26
Aspen Technology Inc. 62% 13% 25% 8
AppFolio Inc. Class A 25% 50% 25% 4
Five9 Inc. 47% 47% 6% 15
ANGI Homeservices Inc. Class A 80% 20% 0% 15
Paylocity Holding Corp. 73% 27% 0% 15
CoStar Group Inc. 83% 0% 17% 12
RealPage Inc. 100% 0% 0% 7
Virtusa Corp. 100% 0% 0% 8
Source:FactSet

Here are price targets for the group:

Company Ticker Closing price - March 5 Consensus price target Implied 12-month upside potential
Zscaler Inc. $57.53 $55.38 -4%
Okta Inc. Class A $80.11 $78.94 -1%
Splunk Inc. $125.31 $150.61 20%
Pluralsight Inc. Class A $30.94 $38.50 24%
Ansys Inc. $178.75 $190.77 7%
ForeScout Technologies Inc. $42.03 $46.00 9%
Autodesk Inc. $154.71 $179.00 16%
Aspen Technology Inc. $98.52 $103.14 5%
AppFolio Inc. Class A $68.23 $61.50 -10%
Five9 Inc. $52.00 $57.15 10%
ANGI Homeservices Inc. Class A $16.38 $20.93 28%
Paylocity Holding Corp. $83.19 $87.77 6%
CoStar Group Inc. $463.90 $480.10 3%
RealPage Inc. $58.88 $67.83 15%
Virtusa Corp. $50.04 $63.71 27%
Source: FactSet

Don’t miss: The U.S. stock market has now split into the ‘haves’ and ‘have nots’

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/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
7,700.10
-74.05 -0.95%
Volume: 3.56M
March 31, 2020 5:16p
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/zigman2/quotes/210599714/realtime
US : S&P US
2,584.59
-42.06 -1.60%
Volume: 3.99B
March 31, 2020 5:14p
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/zigman2/quotes/210599897/delayed
US : S&P US
1,443.40
-15.75 -1.08%
Volume: 786.42M
March 31, 2020 5:14p
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/zigman2/quotes/210599868/delayed
US : S&P US
684.84
-0.48 -0.07%
Volume: 672.93M
March 31, 2020 5:14p
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 157.71
-2.52 -1.57%
Volume: 77.93M
March 31, 2020 4:00p
P/E Ratio
27.45
Dividend Yield
1.29%
Market Cap
$1218.72 billion
Rev. per Employee
$902,473
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,949.72
-14.23 -0.72%
Volume: 5.12M
March 31, 2020 4:00p
P/E Ratio
84.71
Dividend Yield
N/A
Market Cap
$977.67 billion
Rev. per Employee
$359,671
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/zigman2/quotes/203585803/composite
US : U.S.: Nasdaq
$ 60.86
+2.02 +3.43%
Volume: 3.65M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.61 billion
Rev. per Employee
$231,369
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/zigman2/quotes/210420951/composite
US : U.S.: Nasdaq
$ 122.26
-2.68 -2.15%
Volume: 2.50M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.34 billion
Rev. per Employee
$255,768
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/zigman2/quotes/203060494/composite
US : U.S.: Nasdaq
$ 126.23
-0.99 -0.78%
Volume: 2.47M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$20.18 billion
Rev. per Employee
$563,441
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/zigman2/quotes/201577487/composite
US : U.S.: Nasdaq
$ 10.98
-0.53 -4.60%
Volume: 1.86M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.21 billion
Rev. per Employee
$210,935
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/zigman2/quotes/207638775/composite
US : U.S.: Nasdaq
$ 232.47
-2.66 -1.13%
Volume: 945,710
March 31, 2020 4:00p
P/E Ratio
44.36
Dividend Yield
N/A
Market Cap
$20.20 billion
Rev. per Employee
$380,481
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/zigman2/quotes/205654246/composite
US : U.S.: Nasdaq
$ 31.59
+0.34 +1.09%
Volume: 2.34M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.53 billion
Rev. per Employee
$266,712
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/zigman2/quotes/209828392/composite
US : U.S.: Nasdaq
$ 156.10
+0.19 +0.12%
Volume: 3.68M
March 31, 2020 4:00p
P/E Ratio
162.01
Dividend Yield
N/A
Market Cap
$34.23 billion
Rev. per Employee
$292,023
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/zigman2/quotes/201282485/composite
US : U.S.: Nasdaq
$ 95.07
-2.88 -2.94%
Volume: 604,507
March 31, 2020 4:00p
P/E Ratio
26.46
Dividend Yield
N/A
Market Cap
$6.65 billion
Rev. per Employee
$345,445
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/zigman2/quotes/209340958/composite
US : U.S.: Nasdaq
$ 110.95
+3.35 +3.11%
Volume: 239,794
March 31, 2020 4:00p
P/E Ratio
108.34
Dividend Yield
N/A
Market Cap
$3.68 billion
Rev. per Employee
$207,501
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/zigman2/quotes/209043265/composite
US : U.S.: Nasdaq
$ 76.46
+0.18 +0.24%
Volume: 2.13M
March 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.70 billion
Rev. per Employee
$262,120
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/zigman2/quotes/209149959/composite
US : U.S.: Nasdaq
$ 5.25
+0.21 +4.17%
Volume: 1.98M
March 31, 2020 4:00p
P/E Ratio
77.89
Dividend Yield
N/A
Market Cap
$2.53 billion
Rev. per Employee
$251,609
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/zigman2/quotes/206986696/composite
US : U.S.: Nasdaq
$ 88.32
-2.93 -3.21%
Volume: 630,184
March 31, 2020 4:00p
P/E Ratio
85.19
Dividend Yield
N/A
Market Cap
$4.89 billion
Rev. per Employee
$160,666
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/zigman2/quotes/208228061/composite
US : U.S.: Nasdaq
$ 587.21
-12.78 -2.13%
Volume: 345,785
March 31, 2020 4:00p
P/E Ratio
68.29
Dividend Yield
N/A
Market Cap
$21.99 billion
Rev. per Employee
$321,682
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/zigman2/quotes/207438378/composite
US : U.S.: Nasdaq
$ 52.93
-1.15 -2.13%
Volume: 763,076
March 31, 2020 4:00p
P/E Ratio
87.47
Dividend Yield
N/A
Market Cap
$5.12 billion
Rev. per Employee
$140,239
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/zigman2/quotes/205784302/composite
US : U.S.: Nasdaq
$ 28.40
+0.15 +0.53%
Volume: 234,055
March 31, 2020 4:00p
P/E Ratio
29.42
Dividend Yield
N/A
Market Cap
$843.57 million
Rev. per Employee
$58,573
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/zigman2/quotes/206849619/realtime
US : U.S.: Nasdaq
$ 20.19
+0.04 +0.20%
Volume: 0.00
March 31, 2020
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/zigman2/quotes/210159846/realtime
US : U.S.: Nasdaq
$ 20.08
+0.04 +0.20%
Volume: 0.00
March 31, 2020
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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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