Mid-season earnings report: Cloud stocks passes the test

Earnings season rages on — with two cloud stocks set to report earnings after the market close today — Cloudflare and Hubspot.

What’s the big deal? Both stocks are high-quality names — beaten down from the correction in recent months.

• Cloudflare (NASDAQ:NET) provides cloud web security services — replacing traditional routers, firewalls, VPNS, etc.
• HubSpot (NASDAQ:HUBS) provides businesses of all sizes with cloud software in sales and marketing tools.
• WS analysts’ price targets: $HUBS — $752.55 high (46% upside), $500 low; $NET — $155 high (39% upside), $95 low.

Both benefited from the pandemic (i.e. increased need for software tools and security for work-from-home). But in recent months, their unprofitability made them unpopular…

• According to research by ACG Partners (via SA), of the 100 software stocks tracked by ACG, the 50 least unprofitable fell 29% vs. a 10% drop in the 50 more profitable ones.

How are we doing? Despite a large drop in stock prices, earnings reports show the cloud business’ fundamentals to be intact — with continued earnings and sales growth…

• Those that reported earnings include Bill, Qualtrics, ServiceNow, and Fortinet — which beat expectations and rose post-earnings.
• They’re moving back up in reflection of their fundamentals — as investors may have oversold.

Cloud wreckage: It’s too soon to call a bottom on growth stocks — especially with an interest rate increase expected in March. But it doesn’t hurt to pick up strong companies beaten down for external reasons — and holding for the long-term.

More cloud earnings next week: Shopify (NYSE:SHOP), Wix (NASDAQ:WIX), Appian (NASDAQ:APPN), Dropbox (NASDAQ:DPX).

Dive deeper: Here’s why the correction in cloud stocks may only be temporary.