BofA Reinstates Coverage Of Cloud Stocks, Names Top Picks For 2021

Cloud services is one segment that has gotten a big boost in 2020 due to the pandemic, with many cloud stocks up big year-to-date. On Wednesday, BofA Securities reinstated coverage of five cloud stocks and named its top picks in the group.

The Cloud Analyst: Brad Sills reinstated coverage of the following cloud stocks:

• Microsoft Corporation MSFT, Buy rating, $256 price target.
• Salesforce.com, Inc. CRM, Buy rating, $275 price target.
• Workday Inc WDAY, Buy rating, $265 price target.
• ServiceNow Inc NOW, Buy rating, $650 price target.
• Oracle Corporation ORCL, Neutral rating, $68 price target.

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The Cloud Thesis: Sills is anticipating bullish momentum will continue for cloud stocks in 2021 and beyond, but he said some stocks are more compelling values than others.

BofA is projecting that Microsoft can maintain double-digit revenue growth for at least the next three to five years, driven by the continued success of its Azure cloud infrastructure platform, the analyst said.

In addition, Office 265 and a booming Xbox gaming business should generate tailwinds for Microsoft, he said. 

Workday is well-positioned to continue to gain market share in the human capital management and financials markets, which are worth a combined $29.7 billion this year, Sills said. 

Workday’s massive installed base of around 3,500 cloud customers gives the company a competitive advantage over peers, the analyst said. 

While Oracle’s cloud business has been accelerating, he said its cloud transition is still in the early stages, creating risk for investors.

BofA projects that about 69% of Oracle’s fiscal 2021 revenue will come from its zero-growth, legacy on-premise licensing, maintenance and hardware businesses.

Sills named Salesforce as a top cloud stock pick due to its large installed user base and its impressive organic revenue growth runway.

“With sustained low 20s org rev growth possible in the coming years, and modest sales productivity improvement, we believe CRM will likely generate solid Margin expansion and 25%+ FCF growth,” the analyst said.

His other top stock pick is ServiceNow, which he said is a key driver of workplace automation.

“ServiceNow screens well in our 4M’s framework for software investing - Market, competitive Moat, Management strength and Margin potential.” 

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.

Photo courtesy of Workday.