Following a recent, widely-reported cloud computing outage incident, you may be wondering what cloud stocks to sell. Besides the company in question behind the outage, there are other cloud stocks where exiting your position is likely the best move. For different reasons, of course.
There are, for instance, cloud stocks that have become overvalued, even when accounting for expected growth. “Priced for perfection,” just the slightest bit of disappointment could send them lower. Alongside this, there are also cloud stocks that already experienced sharp price declines, but are at risk of a further drop. Largely, because the issues driving their initial fall from grace are likely to persist.
To top things off, there are also cloud stocks, once super hot, that in recent years have become a bit of a “value trap.” With all of this in mind, let’s dive in, to find out about the top cloud stocks to sell right now.
CrowdStrike Holdings (CRWD)
It’s no surprise that CrowdStrike Holdings (NASDAQ:CRWD) makes it to the top of this list. As you likely know, CrowdStrike is the company that recently experienced a software glitch that in turn resulted in what’s being called the largest IT outage in history.
CRWD stock sank by more than 11% on the day of the incident. Shares in the cloud-based cybersecurity company have since continued to decline. Despite growing hopes that the “worst is now priced-in,” it may be far too soon to jump to that conclusion. CRWD remains richly-priced at 64.2 times forward earnings. It’s possible that investors have not quite yet taken into account the uncertain impact of this incident on future growth.
Crowdstrike is scheduled to next report earnings late next month. With this, another big price decline may be just around the corner. Either the company’s updates to guidance, if indicating worse-than-feared changes to future growth due to the outage, cause shares to fall. Or, with investors still holding a bearish, fearsome view of the stock, the market latches onto the more negative aspects of an overwise mixed or positive earnings release, using it as justification to drive a post-earnings sell-off.
DigitalOcean Holdings (DOCN)
On the surface, DigitalOcean Holdings (NYSE:DOCN) may not look like it’s one of the top cloud stocks to sell. After all, shares in this cloud infrastructure company trade at a relatively low 19.6 times forward earnings. If growth in the coming quarters meets or beats expectations, it could dramatically improve investor sentiment for shares.
This in turn may result in a massive re-rating for DOCN stock, which is down over 75% from its all-time high of $130.26 per share. A turnaround and better-than-feared results could in theory make DOCN a comeback kid. Unfortunately, the chances of a such a comeback taking shape may be far too slim to justify the risk of taking a speculative stake in this once-popular tech stock. A big reason for this has to do with competition.
As Seeking Alpha commentator DT Invest noted back in May, DigitialOcean competes directly with cloud behemoths like Amazon’s (NASDAQ:AMZN) AWS and Microsoft’s (NASDAQ:MSFT) Azure. Even if these larger, Magnificent Seven backed platforms fail to muscle DigitalOcean out of business, this factor could limit the extent of future growth. Further concerns about DOCN’s prospects may lead to a further de-rating.
IBM (IBM)
Previously, I have been skeptical about IBM’s (NYSE:IBM) potential to experience a growth resurgence thanks to the generative artificial intelligence (GenAI) growth trend. Even as shares in the legendary tech company have bounced back after giving back some “AI mania” gains during May, this continues to be my view.
IBM’s recent quarterly earnings beat has been taken to be a sign that the company is indeed experiencing an AI and cloud-driven growth renaissance. However, many analysts have noted that the latest results and guidance were largely mixed in nature. With IBM stock continuing to climb towards its prior highs following the earnings release, shares may once again be “priced for perfection.”
Don’t get me wrong. Upcoming tech earnings releases could drive a broad sector rally. If this happens, IBM may not be at risk of an immediate correction. Still, with expectations once again elevated, the next round of uncertainty and doubt about GenAI could lead to a dramatic reversal for shares. Whether you bought it at the beginning of the AI boom, or scooped up a position during its mid-spring dip, now may be the time to take the money and run with “Big Blue.”
Monday.com (MNDY)
Monday.com (NASDAQ:MNDY), a provider of cloud-based workflow software, has been making a steady recovery over the past year. While far from past highs hit during just before the 2022 tech stock sell-off, following MNDY’s partial recovery, shares have climbed back up to a staggering-high forward valuation.
At current prices, MNDY stock trades at forward price-to-earnings (P/E) ratio of 101. That’s quite high, any way you slice it. Although a rich valuation can persist, if bullish sentiment continues, there’s a potential negative catalyst that could drive a sentiment shift. In turn, resulting in a painful price correction. As Hedgeye analyst Andrew Freedman noted in June, Monday.com’s recent subscription price hike could lead to increased churn. These increases may also hurt new customer growth.
Freedman believes this factor could drive an up to 30% price decline within 9-12 months, but a sharp pullback could potentially arrive even sooner. With the company set to next results before the market opens on August 12, on that date disappointment with results and guidance could possibly lead to a post-earnings sell-off. Hence, consider MNDY one of the cloud stocks to sell, pronto.
Cloudflare (NET)
In the midst of the Crowdstrike outage and subsequent price plunge for CRWD, shares in other cloud-based cybersecurity firms, like Cloudflare (NYSE:NET), inched slightly higher. Yes, it’s possible that Crowdstrike’s blunder is a potential positive for key competitors. Even so, keep in mind that NET is already well priced to vastly exceed expectations.
Right now, NET stock not only sells for 126 times this year’s estimated earnings. Shares trade for 100 times estimated 2025 earnings. Granted, if Cloudflare manages to pull off a series of massive earnings beats, shares may be able to sustain such a rich valuation. Yet if results are only slightly better-than-expected, or worse, merely meet/slightly miss expectations, the negative impact on NET’s share price could be massive.
A similar scenario could play out, if subsequent guidance updates fall short. That’s what happened following Cloudflare’s last earnings release in early May. With the company just days away from unveiling its latest quarterly results and updates to guidance, you may want to take the cautious route. Instead of holding onto positions into the Aug. 1 earnings release, sell or take profit now.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) is another name I’ve long considered one of the cloud stocks to sell. In large part, due to the fact investors overly priced-in a dubious GenAI catalyst into SNOW during late 2023 and early 2024. Although the market began to walk back this view as early as late February, when shares experienced a sharp plunge in price, I believed that a further avalanche to lower prices was in the cards.
Since making this argument back in April, SNOW stock has continued to drift lower. Yet while shares in this cloud data provider are down by more than 45% from their 52-week high, further downside risk may remain. Snowflake shares currently trade for over 200 times forward earnings. Although sell-side analysts anticipate more than 57% earnings growth next fiscal year, it may prove difficult to hit or exceed this forecast.
Why? Besides the still-strong possibility that AI growth fails to arrive as expected, other factors could affect the bottom line. For instance, as InvestorPlace’s Yiannis Zourmpanos recently noted, Snowflake’s AI buildout is hurting gross margins. If this and other factors lead to a series of earnings misses, SNOW may be in for additional rounds of multiple compression.
Zoom Video Communications (ZM)
Sure, it may be a bit of a stretch to call Zoom Video Communications (NASDAQ:ZM) a cloud stock. However, Zoom’s video conferencing platform is cloud-based. Not only that, the company, still getting over its post-pandemic growth hangover, has attempted to cash in on the AI boom, with new AI-powered cloud-based platforms like Zoom Workplace.
Still, while the company is actively working to get back into high-growth mode, few on Wall Street are buying it. Forecasts still call Zoom to experience little in the way of improved results during the upcoming fiscal year ending January 2021. It’s not a mistake on the market’s part that ZM stock sells for less than 12 times estimated earnings. Worse yet, this “cheap” tech stock could get even cheaper.
Pretty soon, investors may cease to give Zoom the benefit of the doubt when it comes to a potential growth resurgence. If the market ends up convinced that Zoom is a “tech dinosaur,” ZM could sink to a valuation on par with other low-growth “dinosaurs” like Xerox Holdings (NASDAQ:XRX). XRX trades at a valuation nearly half that of Zoom’s current forward multiple.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly orindirectly) any positions in the securities mentioned in this article.