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Sept. 12, 2019, 9:03 a.m. EDT

How to pick long-term stock winners in cloud computing

Investors have dumped cloud stocks, which could prove to be a costly mistake

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By Beth Kindig

Cloud software stocks suffered a reversal that has produced losses of close to 50% from record highs.

The story for those stocks hasn’t changed, but the valuations have, and that could be a good thing for investors who know what they own.

The biggest risk for investors in cloud stocks isn’t the losses that have pummeled prices over the past two weeks, but rather the big reversal that may scare them away from the sector. It’s painful to watch large declines in stocks, yet nobody wants to miss out on a potential 10-bagger either. When the market rewards, and penalizes, all cloud software stocks equally, with little differentiation, it’s prudent to choose a select group that has compelling stories for a buy-and-hold strategy.

An investing adage is to buy when others are fearful. I would say to buy when others can’t differentiate among companies. Clearly, from what we saw over the past two weeks, a broad range of companies are being lumped together, with little recognition as to which are the winners.

To put it simply, this is a great time to know what you own as the story for these stocks is much deeper than the simple descriptor of “cloud software.”

In the graphic above, the orange line represents the First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY +0.89%  which holds about 60 positions, all of which dominate the cloud space. The light-blue line is the Consumer Staples Select Sector ETF /zigman2/quotes/200697959/composite XLP -0.43% , which tracks the consumer staples sector, a group that’s thought to be impervious to recessions. Those have historically been the laggards in this long, growth-driven bull market. The dark purple line is the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.00% .

Before the stock market correction in May, cloud stocks were the leader in the market, while the staples were trailing. However, since that first correction, and up till today, there’s been a reversal. Over the past week high-growth leaders in this bull market, mostly cloud, have taken big hits.

For example:

Workday /zigman2/quotes/201157610/composite WDAY +0.40%  is down 25% from its high. Twilio /zigman2/quotes/205796518/composite TWLO -1.18% , down 26%. Okta /zigman2/quotes/210420951/composite OKTA +0.08% , down 22%. Zoom /zigman2/quotes/211319643/composite ZM +0.44% , down 27%. MongoDB /zigman2/quotes/203302825/composite MDB -1.92% , down 29%. PagerDuty /zigman2/quotes/210571191/composite PD +3.71% , down 47%. (All prices are current as of 2 p.m. Eastern time Sept. 11.)

Stock Ticker High price from past 60-80 days Current price Price change
Workday /zigman2/quotes/201157610/composite WDAY $224 $171 -24%
Twilio  /zigman2/quotes/205796518/composite TWLO $149 $110 -26%
Okta /zigman2/quotes/210420951/composite OKTA $140 $106 -24%
Zoom Technologies /zigman2/quotes/203420377/delayed ZOOM $102 $81 -21%
Alteryx /zigman2/quotes/202651591/composite AYX $147 $115 -22%
MongoDB /zigman2/quotes/203302825/composite MDB $158 $130 -18%
Splunk /zigman2/quotes/203060494/composite SPLK $140 $113 -19%
CrowdStrike Holdings /zigman2/quotes/212513426/composite CRWD $99 $68 -31%
PagerDuty /zigman2/quotes/210571191/composite PD $57 $30 -47%
Veeva Systems /zigman2/quotes/202850210/composite VEEV $175 $143 -18%
Stock Ticker  Price two weeks ago Current price Price change
Workday /zigman2/quotes/201157610/composite WDAY $193 $171 -11%
Twilio  /zigman2/quotes/205796518/composite TWLO $132 $110 -17%
Okta /zigman2/quotes/210420951/composite OKTA $137 $106 -23%
Zoom Technologies /zigman2/quotes/203420377/delayed ZOOM $92 $81 -12%
Alteryx /zigman2/quotes/202651591/composite AYX $147 $115 -22%
MongoDB /zigman2/quotes/203302825/composite MDB $154 $130 -16%
Splunk /zigman2/quotes/203060494/composite SPLK $128 $113 -12%
CrowdStrike Holdings /zigman2/quotes/212513426/composite CRWD $99 $68 -31%
PagerDuty /zigman2/quotes/210571191/composite PD $39 $30 -23%
Veeva Systems /zigman2/quotes/202850210/composite VEEV $168 $143 -15%

Cloud software categories

To start, cloud software needs to be broken up into categories to look more closely at the markets they serve. Here are some examples:

• Twilio is at the intersection of communications and mobile.

• CrowdStrike /zigman2/quotes/212513426/composite CRWD +1.27%  and Okta are security companies.

/zigman2/quotes/205187458/composite
US : U.S.: Nasdaq
$ 57.69
+0.51 +0.89%
Volume: 189,367
Oct. 15, 2019 4:00p
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/zigman2/quotes/200697959/composite
US : U.S.: NYSE Arca
$ 60.28
-0.26 -0.43%
Volume: 12.23M
Oct. 15, 2019 4:10p
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/zigman2/quotes/210599714/realtime
US : S&P US
2,995.68
+29.53 +1.00%
Volume: 1.68B
Oct. 15, 2019 5:00p
loading...
/zigman2/quotes/201157610/composite
US : U.S.: Nasdaq
$ 180.96
+0.72 +0.40%
Volume: 3.07M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$41.09 billion
Rev. per Employee
$269,447
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/zigman2/quotes/205796518/composite
US : U.S.: NYSE
$ 115.21
-1.38 -1.18%
Volume: 2.20M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.85 billion
Rev. per Employee
$451,435
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/zigman2/quotes/210420951/composite
US : U.S.: Nasdaq
$ 115.86
+0.09 +0.08%
Volume: 2.42M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$13.52 billion
Rev. per Employee
$255,768
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/zigman2/quotes/211319643/composite
US : U.S.: Nasdaq
$ 71.11
+0.31 +0.44%
Volume: 10.58M
Oct. 15, 2019 4:00p
P/E Ratio
1,751
Dividend Yield
N/A
Market Cap
$19.37 billion
Rev. per Employee
N/A
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/zigman2/quotes/203302825/composite
US : U.S.: Nasdaq
$ 134.90
-2.65 -1.92%
Volume: 788,178
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.75 billion
Rev. per Employee
$277,563
loading...
/zigman2/quotes/210571191/composite
US : U.S.: NYSE
$ 27.43
+0.98 +3.71%
Volume: 1.42M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/201157610/composite
US : U.S.: Nasdaq
$ 180.96
+0.72 +0.40%
Volume: 3.07M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$41.09 billion
Rev. per Employee
$269,447
loading...
/zigman2/quotes/205796518/composite
US : U.S.: NYSE
$ 115.21
-1.38 -1.18%
Volume: 2.20M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.85 billion
Rev. per Employee
$451,435
loading...
/zigman2/quotes/210420951/composite
US : U.S.: Nasdaq
$ 115.86
+0.09 +0.08%
Volume: 2.42M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$13.52 billion
Rev. per Employee
$255,768
loading...
/zigman2/quotes/203420377/delayed
US : U.S.: OTC
$ 2.50
+0.13 +5.49%
Volume: 9,175
Oct. 15, 2019 3:58p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
N/A
loading...
/zigman2/quotes/202651591/composite
US : U.S.: NYSE
$ 112.23
-1.82 -1.60%
Volume: 1.49M
Oct. 15, 2019 4:10p
P/E Ratio
397.13
Dividend Yield
N/A
Market Cap
$7.16 billion
Rev. per Employee
$316,962
loading...
/zigman2/quotes/203302825/composite
US : U.S.: Nasdaq
$ 134.90
-2.65 -1.92%
Volume: 788,178
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.75 billion
Rev. per Employee
$277,563
loading...
/zigman2/quotes/203060494/composite
US : U.S.: Nasdaq
$ 119.85
+0.17 +0.14%
Volume: 886,777
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$18.47 billion
Rev. per Employee
$563,441
loading...
/zigman2/quotes/212513426/composite
US : U.S.: Nasdaq
$ 55.21
+0.69 +1.27%
Volume: 1.98M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$12.32 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/210571191/composite
US : U.S.: NYSE
$ 27.43
+0.98 +3.71%
Volume: 1.42M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/202850210/composite
US : U.S.: NYSE
$ 156.47
+3.24 +2.11%
Volume: 962,855
Oct. 15, 2019 4:10p
P/E Ratio
85.57
Dividend Yield
N/A
Market Cap
$22.68 billion
Rev. per Employee
$397,149
loading...
/zigman2/quotes/201157610/composite
US : U.S.: Nasdaq
$ 180.96
+0.72 +0.40%
Volume: 3.07M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$41.09 billion
Rev. per Employee
$269,447
loading...
/zigman2/quotes/205796518/composite
US : U.S.: NYSE
$ 115.21
-1.38 -1.18%
Volume: 2.20M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.85 billion
Rev. per Employee
$451,435
loading...
/zigman2/quotes/210420951/composite
US : U.S.: Nasdaq
$ 115.86
+0.09 +0.08%
Volume: 2.42M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$13.52 billion
Rev. per Employee
$255,768
loading...
/zigman2/quotes/203420377/delayed
US : U.S.: OTC
$ 2.50
+0.13 +5.49%
Volume: 9,175
Oct. 15, 2019 3:58p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
N/A
loading...
/zigman2/quotes/202651591/composite
US : U.S.: NYSE
$ 112.23
-1.82 -1.60%
Volume: 1.49M
Oct. 15, 2019 4:10p
P/E Ratio
397.13
Dividend Yield
N/A
Market Cap
$7.16 billion
Rev. per Employee
$316,962
loading...
/zigman2/quotes/203302825/composite
US : U.S.: Nasdaq
$ 134.90
-2.65 -1.92%
Volume: 788,178
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.75 billion
Rev. per Employee
$277,563
loading...
/zigman2/quotes/203060494/composite
US : U.S.: Nasdaq
$ 119.85
+0.17 +0.14%
Volume: 886,777
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$18.47 billion
Rev. per Employee
$563,441
loading...
/zigman2/quotes/212513426/composite
US : U.S.: Nasdaq
$ 55.21
+0.69 +1.27%
Volume: 1.98M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$12.32 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/210571191/composite
US : U.S.: NYSE
$ 27.43
+0.98 +3.71%
Volume: 1.42M
Oct. 15, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/202850210/composite
US : U.S.: NYSE
$ 156.47
+3.24 +2.11%
Volume: 962,855
Oct. 15, 2019 4:10p
P/E Ratio
85.57
Dividend Yield
N/A
Market Cap
$22.68 billion
Rev. per Employee
$397,149
loading...
/zigman2/quotes/212513426/composite
US : U.S.: Nasdaq
$ 55.21
+0.69 +1.27%
Volume: 1.98M
Oct. 15, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$12.32 billion
Rev. per Employee
N/A
loading...
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