All three major U.S. indexes climbed again Thursday as Wall Street’s optimism about the global economy starting to return to something like normal grows. The coronavirus and fears surrounding it are poised to linger for some time, yet investors appear ready to look to what’s next. And tech remains a go-to industry, especially now.
Millions of more Americans filed for unemployment benefits last week, but the weekly figures have slowed from what might be the peak in the last week of March. Coupled with the fact that economies are slowing reopening, investors might continue to ride the current momentum that has seen the S&P 500 surge roughly 25% from its March 23 lows.
There are new fears of another trade dispute between the U.S. and China. Plus, overall S&P 500 earnings are projected to fall 12.8% in the first quarter, with things expected to get far worse in Q2 when the full impact of the coronavirus shut down is hopefully felt. That said, tech has so far been able to stay above the fray, with Q1 earnings tech sector S&P 500 earnings up 6.1% so far (also read: Making Sense of the Pandemic Earnings Picture).
With all this in mind, volatility could remain and stocks might even fall again in the near-term. Therefore, investors should look for stocks within growth industries that present strong longer-term buying opportunities. So let’s look at three cloud-focused tech stocks that might be worth buying right now…
Zendesk, Inc. ZEN
Zendesk is a cloud-focused CRM firm with a software portfolio geared toward sales, support, and customer engagement. The company boasts over 160,000 customers and services everyone from startups to big businesses. ZEN topped our Q1 earnings and sales estimates at the end of April, with revenue up 31%. Zendesk did withdraw its pervious full-year guidance due to the coronavirus, but did offer second quarter guidance.
ZEN shares have soared nearly 200% in the past three years to crush its industry’s 35%, even though they have cooled off recently. That said, Zendesk stock has popped 25% since the market’s March 23 lows and jumped another 7% through morning trading Thursday to reach $78.75 a share. This gives the stock 17% more room to run before it has to break through its 52-week highs. Meanwhile, ZEN is trading at 7.4X forward 12-months sales, which marks a discount against its two-year median of 9X and its 11X high during this stretch, and is not too far off its industry’s 6.7X average.
Our Zacks estimates call for ZEN’s Q2 revenue to jump 23.1%, with its full-year sales projected to climb 23% and 24%, respectively in FY20 and FY21 to reach $1.25 billion. These estimates mark a slowdown from 2019’s 36% revenue growth, but represent solid expansion during uncertain times. Plus, Zendesk’s adjusted Q2 earnings are projected to skyrocket 100%. And its adjusted fiscal 2020 EPS figure is projected to climb 45% to reach $0.45 a share, with FY21 set to climb another 52% higher.
ZEN is currently a Zacks Rank #3 (Hold) that sports “A” grades for both Growth and Momentum in our Style Scores system, while resting in an industry that ranks in the top 22% of our more than 250 Zacks industries.
Adobe sells a variety of cloud-based offerings, including its suite of creative software such as Photoshop, alongside subscription solutions for businesses, schools, and more. The San Jose, California-based firm breaks its revenue streams down into three general categories: Creative Cloud, Document Cloud, and Experience Cloud. The coronavirus is likely to impact Adobe—like nearly all firms—but its subscription-based model should help create more predictable sales during these unpredictable times.
ADBE topped our Q1 fiscal 2020 earnings estimate on March 12 and posted record quarterly revenue of $3.09 billion, up 19%. Looking ahead, our Zacks estimates call for ADBE’s fiscal 2020 sales to jump 16.3%, with FY21 projected to climb another 15% higher to hit $14.92 billion. These would come on top of the cloud software firm’s roughly 24% revenue growth in the trailing three years.
On the bottom-end of the income statement, its adjusted earnings are projected to pop 24.4% and 13.5%, respectively over the next two fiscal years. Adobe is also a Zacks Rank #2 (Buy) at the moment and boasts a “B” grade for Growth. Plus, investors should note that many of Adobe’s creative software offerings are often considered irreplaceable by their users.
Shares of Adobe have climbed roughly 12% in 2020 to crush the S&P 500’s 11% drop. ABDE stock has also surged 175% in past three years to put it neck-and-neck with Netflix NFLX and easily top Apple AAPL. The stock, which still rests 5% below its 52-week highs, is also trading well below its three highs in terms of forward 12-month sales.
Microsoft is an obvious pick. MSFT topped our Q3 fiscal 2020 earnings and revenue estimates on April 29, with sales up 15%. Cloud computing once again helped drive the historic tech giant, with Intelligent Cloud up 27% for the second quarter in a row. MSFT’s cloud segment pulled in $12.3 billion, which was the most of its three units. Meanwhile, its Office-heavy Productivity and Business Processes jumped 15%, with personal computing up 3%.
Microsoft’s cloud business is an industry leader alongside Amazon AMZN. Plus, its Office 365 suite remains vital to businesses, governments, schools, and consumers, and its Teams business is tailor-made for the current stay-at-home environment, as it fends off smaller rivals Slack WORK and Zoom ZM. MSFT shares are up 48% in the last 12 months and 17% in 2020 as they race back toward their highs.
Microsoft is well positioned to weather the current economic storm, as it held over $137 billion in cash, cash equivalents, and short-term investments at the end of the quarter. Plus, its dividend yield nearly doubles the 10-year U.S. Treasury note. MSFT returned $9.9 billion to shareholders via stock buybacks and dividends during Q3, up 33% from the year-ago period. And it could continue to repurchase stock at a time when many companies have stopped their programs.
Peeking ahead, Microsoft’s current full-year revenue is projected to jump 12.4% and another 10% next year. MSFT’s adjusted EPS figures are projected to surge 20% and 9.2%, respectively over this stretch. MSFT has also seen its fiscal 2021 earnings revisions turn completely positive since it reported to help it earn a Zacks Rank #2 (Buy).