Cloud stocks set to takeover as the next FAANG stocks

Cloud stocks, which benefited from COVID, started 2021 with a big drop as reopening stocks took the spotlight. But rising COVID cases, strong earnings and an extension of WFH policies are pushing these stocks up.

• Since Feb, the BVP cloud index — a group of the largest cloud stocks — fell by over 30% but has since recovered.

Look beyond FAANG for returns

Cloud computing — on-demand computing via the internet — is one of the fastest-growing and largest industries. COVID accelerated its adoption and showed us its importance:

• Zoom (NASDAQ:ZM) — enabled the world to connect through video.
• Shopify (NASDAQ:SHOP) — enabled retailers to build online stores.

Their user-friendliness, low up-front costs and large market potential powered these stocks to record levels.

In the past 20 years, FAANG stocks (i.e. Facebook, Amazon, Apple, Netflix, Google) famously defined the internet. But now, due to their massive size, it’s harder for them to provide multibagger returns like they once did.

Bullying the little guys

What we’ve seen with FAANG stocks is that the best company in each space tends to dominate — i.e Facebook with social, Amazon with e-commerce, Google with search, Netflix with streaming, etc.

• In each FAANG stock’s history, they reach a point where they generate a large amount of cash — which gets reinvested for growth.
• As they get bigger, they gain more pricing power, acquire competitors and launch additional products — pushing out the little guys.

If a similar dynamic plays out, the dominant leaders in different cloud sectors could continue to dominate as they grow.

But every decade brings a new set of stocks that can become tomorrow’s FAANG stocks, and here’s a starting place to look…

Investors: Cloud starter pack

Three market leaders, each less than $75b in market cap, have over 50% growth in recent quarters — and each are going after massive markets:

• Hubspot (NASDAQ:HUBS) — Marketing & sales software.
• Twilio (NASDAQ:TWLO ) — Digital communication tools.
• Crowdstrike (NASDAQ:CRWD) — Cybersecurity software.

Stats: Average 639% total return in the past 5 years, average $51b market cap and average sales growth of 62% in the recent quarters.

While these companies achieved massive growth, they’re still only a fraction of the size of the FAANG stocks.

Looking forward: A report from BVP predicts that the next generation cloud companies will power the tech sector’s growth — many of which are already outperforming FAANG stocks in recent years.