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Are cloud stocks the safest bet within the tech sector? – Stock Market News

In 2022, tech companies have come under significant pressure from multiple fronts. Firstly, they are struggling to sustain their pandemic-era financial figures, which enabled them to outperform the broader markets in 2021. Moreover, the upcoming monetary tightening is expected to negatively affect tech stocks as higher interest rates reduce the value of companies’ future cash flows while borrowing to promote growth becomes less attractive. In this adverse environment, where investors will be actively looking for the tech sector’s relative winners, can cloud stocks be considered as the tech havens?

What is cloud computing and why is it vital for most enterprises?

Cloud technology is considered as the cornerstone for the digital transformation of all kinds of companies. Specifically, it is a technology that leverages virtualisation to provide firms with data storage, computing power, access to databases and a wide variety of on-demand online features. These services are maintained by external providers at remote data centres, thus companies are gaining from the cloud’s attributes without having to establish and maintain their own unique server environment.

Without a doubt, the pandemic accelerated the companies’ needs for more efficient and complete cloud services, but this trend seems to be amongst the few that are not reversing or even slowing down as the world emerges from Covid-19. In that sense, companies that do not have the infrastructure or financing to set up these complex computer systems continue to rely heavily on the substantial features the cloud technology has given them access to. For instance, firms are benefiting from the on-demand services, which allow them to allocate their budgets efficiently as they are only using the specific services required to remain competitive and grow. Furthermore, data stored in the cloud can be accessible and usable from any device in every part of the world. This service has become an essential tool for the newly established trend of remote working.

The usual ‘suspects’

The latest earnings season provided indisputable evidence that digital transformation remains a key theme in markets, with cloud computing being the main driving force behind this development. The first hint came from Microsoft, whose revenue increased by 20% on an annual basis mainly due to its cloud service, Microsoft Azure, which grew by a massive 46% from the previous quarter. These figures suggest that Azure is constantly expanding its market share due to the wide variety of its Office suite’s products, while also operating with wide profit margins. In addition, what differentiates Microsoft from the broader tech sector is its dividend policy, registering 17 consecutive years of dividend growth. Dividends are generally appreciated by investors during inflationary periods.

Google and YouTube parent company Alphabet is also amongst the top cloud infrastructure service providers in the US. The company’s management anticipates that YouTube monetization should drive revenue growth in 2022, but Google's cloud segment would drive earnings growth, indicating cloud’s ability to improve the firms’ profit margins. What is unique about Google’s cloud is that it operates in a more sustainable environment compared to that of the most known clouds. The company plans on running its data centers with carbon-free energy by 2030, which apart from being the most viable long-term business plan, it could also sound attractive to investors tilting towards ESG investments.

Adobe could prove to be a secret gem

Adobe was originally an IT company but has now transformed into a leader in the cloud sector by adapting its large platform to the cloud era. In the last couple of years, Adobe has enhanced its cloud suite by acquiring small firms. For instance, Adobe took over a company called Marketo and Magneto to gain technical know-how in the use of cloud services in the e-commerce sector. Lately, it purchased Workfront to add workflow and project management solutions to its arsenal. These recent collaborations have bolstered Adobe’s growth prospects, which combined with the firm’s ability to generate cash flowsare enabling it to continuously expand and upgrade its cloud computing services.

From a technical perspective, Adobe’s stock has been trending downwards in the medium-term generating a clear structure of lower highs and lower lows. However, a bullish flag pattern has formed, indicating that a bullish breakout might be soon taking place.

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