microsoft (NASDAQ:MSFT) and alphabet (NASDAQ:google)(NASDAQ:Google) Latest quarterly results beat Wall Street expectations as cloud revenue surged due to increased use of artificial intelligence (A.I.)service, bloomberg report. Alphabet’s stock price rose as much as 12%, its biggest gain since July 2015, and its valuation exceeded $2 trillion. Meanwhile, Microsoft rose 3.5%. Still, there are some cloud computing stocks investors should sell in this situation.
The bear case for these companies is that they may incur a high opportunity cost to maintain them. Alternatives such as MSFT and GOOG may prove too attractive. They promise high returns and a place at the forefront of the AI revolution.
On the other hand, some of these cloud computing stocks peaked during the pandemic and were never able to come back to Earth. This means it remains overvalued relative to its long-term growth potential. Here are three cloud computing stocks to avoid.
Zoom Video Communications (ZM)
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Zoom video communication (NASDAQ:ZM) As post-pandemic realities begin to sink in, there may be challenges in maintaining rapid growth rates.
ZM reported fourth-quarter profits and sales that exceeded expectations. Adjusted earnings per share were $1.42, an increase of 16% year over year, and sales were $1,146 million, an increase of 2.6% year over year. This outperformance is due to Zoom’s new contact center products, premium market traction, Zoom Phone, and solid implementation of the latest AI capabilities.
Still, I believe ZM’s valuation is too high to justify its current share price of about $62 per share. The company’s price-to-earnings ratio (PER) is high at 29.95 times, not much different from Microsoft’s 35 times. Putting this together means MSFT’s growth potential is much higher, according to analysts. The company’s revenue is expected to increase by 17%, while Zoom’s is expected to increase by only about 5%.
The opportunity cost of holding onto ZM could be too high, in addition to it trading at a premium to its earnings compared to what else the market has to offer.
Snowflake (SNOW)
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snowflake (New York Stock Exchange:snow) operates in the highly competitive cloud data warehousing market and faces the challenge of differentiating its services and maintaining profitability.
The cloud data warehousing market is crowded with competitors, including: Amazon’s (NASDAQ:AMZN) Redshift, Google BigQuery, Microsoft Azure SQL Data Warehouse. These established players already have large market shares and strong products, making it difficult for Snowflake to differentiate.
Additionally, the underlying technologies used in data warehousing solutions are becoming increasingly standardized. Many competitors offer similar features, making comparisons between identical products very easy.
Revenues have been consistently negative, perhaps because SNOW lacks a lasting competitive advantage. However, analysts predict that breakeven could be reached within the next 12 months, although at the time of writing the expected price-to-sales ratio of 187 times earnings means that the will likely trade at a high premium.
Salesforce (CRM)
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sales force (New York Stock Exchange:CRM) are facing concerns about increased competition in the cloud computing space.
To compete with giants like Microsoft and AWS, Salesforce must continually innovate and enhance its products to stay ahead. Unfortunately, that top line is unsustainable given the opponent.
CRM revenue growth peaked in 2019 and has gradually bottomed out. He is not expected to reach this bottom until 2024, but he is still in free fall so this remains speculation.
CRM’s valuation is also extremely high at 65x. The company’s balance sheet strength is also shaky, with $14.19 billion in cash and $12.59 billion in debt.
There was a time when CRMs dominated the cloud computing market in their own niches. However, I think those days are long gone. While it could earn a spot in your portfolio, I think its high valuation makes it a prime target for attacks by short sellers, especially if the market enters a cyclical downturn.
On the date of publication, Matthew Farley did not have (directly or indirectly) any positions in the securities mentioned in this article. Opinions expressed are those of the author and are subject to InvestorPlace.com. Publishing guidelines.
