Two high-flying cloud stocks are set to soar even higher, despite the recent pullback in the tech sector and expectations that it may continue to lag the broader market. Both Adobe Systems Inc. (ADBE) and Workday Inc. (WDAY) are handily outperforming not just the S&P 500, but also the Nasdaq Composite and the Technology Select Sector SPDR Fund (XLK), both of which are reflective of the overall tech sector. A number of analysts see that strong performance continuing with Bernstein recently upgrading Workday’s stock rating with asset allocation advisor Chantico Global’s Gina Sanchez telling CNBC’s Trading Nation that, “Adobe probably has the best fundamentals.”
2 Cloud Stocks Flying High
|S&P 500||+ 3.6%|
Source: CNN Money, as of 4pm EST 10/18
What It Means
The bullish outlook stems primarily from the strong fundamentals exhibited by the underlying companies. Both have strong growth prospects and investors are taking notice. Meanwhile, tech stocks in general could struggle. “The Nasdaq has been facing real issues and real tests over the last several trading sessions, and I don’t think that’s going to stop,” said Sanchez. (For more, see also: 8 Stocks to Thrive as 2018 Cloud Spending Soars.)
Guidance offered by Adobe at an analyst meeting on Monday supports Sanchez’s thesis about the company’s strong fundamentals. Adobe estimated that its revenue for 2019 would grow by 20% year over year, partly due to recent acquisitions. Adobe is seeing “growth in all the right places,” said Sanchez, adding, “from a fundamental perspective, this is a solid stock.”
“From a fundamental point of view, I think Adobe is probably going to be a clear winner. But I don’t think this is a one, unified group,” says Gina Sanchez, Chantico Global.
The stock also looks good from a technical perspective, according to founder of TradingAnalysis.com, Todd Gordon. “It’s a really nice-looking chart. If we go back to the summer of 2017…it’s a very nice symmetrical, rhythmical, very logical up-trend support,” he said, suggesting the stock has further upside potential.
As for Workday, Bernstein’s Mark Moerdler cited limited competition in the software-as-a-service (SaaS) space as one reason supporting his bullishness for the company. “We have determined that even if the [enterprise resource planning] market moves reasonably slowly to the cloud, it is large enough and the fact there are only a few vendors with a competitive SaaS solution should allow Workday to continue to gain share,” he wrote, according to MarketWatch.
He estimates Workday could grow its subscription revenue from 24% to 36% per year over the next four years, and that’s without snagging market share from competitors Oracle Corp. and SAP SE. Moerdler also thinks the company has the space to grow its margins. He upgraded the stock from market perform to outperform on Wednesday. (For more, see also: 6 Cloud Stocks Poised for Rapid Growth.)
While these analysts are optimistic about these two specific cloud stocks, they aren’t necessarily bullish about the group as a whole. Cloud stocks are a bifurcated group, according to Sanchez, suggesting that investors will have to be choosy about how they invest in the cloud space. For instance, Salesforce is one example of a cloud stock that she believes is “significantly overvalued.” The big question will be at what level the currently volatile market will settle into.