6 Cloud Stocks KeyBanc Likes Right Now

Cloud stocks got a bullish vote of confidence on Tuesday after KeyBanc initiated coverage of a number of software names.

The Analyst: KeyBanc analyst Michael Turits initiated coverage of a number of software stocks, including the following six enterprise applications and cloud companies:

• Salesforce.com, Inc. CRM, Overweight rating and $310 target.
• HubSpot Inc HUBS, Overweight rating and $445 target.
• Microsoft Corporation MSFT, Overweight rating and $250 target.
• ServiceNow Inc NOW, Overweight rating and $620 target.
• Oracle Corporation ORCL, Overweight rating and $65 target.
• Workday Inc WDAY, Overweight rating and $251 target.
• Slack Technologies Inc WORK, Sector Weight rating.

The Thesis: In a note, Turits said enterprise software stocks have several secular growth drivers, including the digital transformation of the global economy, which has been catalyzed by the pandemic. Another growth driver is the shift of applications to the cloud and the cloud security software associated with that move. Finally, the rise of big data driven by advanced intelligence is a booming segment of the software industry.

Related Link: 3 Snowflake Analysts On Cloud Data Stock's Potential: 'Unique Technology Advantage'

Despite all the long-term tailwinds in the space, KeyBanc has singled out companies that have proven management teams and strong business models. He's also particularly bullish on companies that operate in segments with high barriers to entry, such as Microsoft in hyperscale cloud and Salesforce in the enterprise-front market.

Finally, Turits is most bullish on stocks that have attractive valuations and relatively high growth outlooks. The software group's overall valuations are historically high at the moment, including an average earnings multiple of about 32 and an overall enterprise value-to-revenue ratio of 10.4. Turits said investors should focus on growth stocks that have attractive relative valuations compared to their software peers.

Benzinga’s Take: There are certainly plenty of attractive growth stories in the cloud software space, but many of these stocks have gone on huge runs in recent years and are already pricing in several more years of outsized growth. The key for investors in the near term will be identifying which stocks have room to run and which ones are already fully valued based on their growth outlooks.