Three cloud stocks to counter recessionary forces

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Aggressive rate hikes by central banks on both sides of the U.S.-Canada border to rein in searing inflation have raised investor concern about a tightening cycle that could lead to a recession.

While the definition of a recession may vary depending on who you ask, there is no denying that weaker trade data, the war in Ukraine, the residual economic effects of COVID-19 and the blockchain crisis supplies continue to hamper economies in much of the developed world.

With more interest rate hikes on the horizon, which could put a damper on borrowing on both sides of the border, Canadian investors may want to consider recession-proofing their portfolios. The following stocks make products and services that enjoy relative immunity to economic upheaval and are considered a good counterweight in recessionary environments.

Cloud computing giant Salesforce Inc (CRM) offers customer relationship management technology that brings businesses and customers closer together. It also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, Salesforce platform, which enables businesses to build apps, and other solutions.

Salesforce.com represents one of the best long-term growth stories in software. “Having introduced the software-as-a-service model to the world, Salesforce.com has built a front-office empire it can build on for years to come,” a Morningstar stock report said.

The major software is benefiting from natural cross-selling between its clouds, upselling of more robust features within product lines, pricing actions, international growth and continued acquisitions, the report adds.

The company is widely regarded as a leader in each of its markets served, which is attractive in itself, but the natural fit of its solutions with each other makes it a powerful value proposition.

“Investors looking for signs of a broader enterprise software slowdown will have to look elsewhere after Salesforce reported strong results amid a variety of macro headwinds,” says equity analyst Dan Romanoff.

Salesforce posted more than $7 billion in revenue in the first quarter, up 24% year-over-year. Non-GAAP operating margin also exceeded expectations.

“Salesforce remains one of our top software picks and we view the stock as attractive as we believe investors are too pessimistic about near-term fears,” says Romanoff, who recently downgraded the fair value of the action at $305 versus $320, prompted by “macro storm clouds.

Okta (OKTA) sells identity and access management solutions. The company’s software solutions are delivered by the cloud and its integrated network provides customers with secure protection and access to a wide variety of applications critical to business and government needs.

Okta’s cloud-based solutions disrupted the existing user protection methodology and provided access to digital resources based on on-premises products. “Okta’s innovative solutions for user access and security will provide it with a lasting presence and strong revenue growth alongside significant margin expansion,” a Morningstar stock report said.

It benefits from the growing reliance of businesses on user-based cybersecurity. “We believe that managing access and protecting networks against malicious actors based on credentials are the cornerstones of cybersecurity,” said Morningstar equity analyst Malik Ahmed Khan.

Along with a rapidly expanding customer base and larger deals, Okta is migrating upstream to attract more enterprise customers and expand internationally. “We expect Okta’s solutions to be in high demand as entities want a seamless experience for their employees and customers when accessing requested applications, while ensuring networks are protected,” said Khan, who recently lowered the stock’s fair value to $193 from $280, due to a more conservative stance on long-term profitability assumptions.

However, he maintains that the stock’s fair value is still well above the company’s current stock price. “We continue to believe that the market’s reaction to recent macro events has been overdone,” he said.

A cloud-focused software company, Splunk (SPLK) focuses on machine data analytics and is a major player in two markets: security and comprehensive monitoring and analytics. The company is in the midst of a cloud transition, shifting its on-premises customers to its cloud products which are delivered as software as a service.

From a security perspective, Splunk’s Security Information and Event Management (SIEM) functions as a sophisticated alert system, issuing alerts if malicious activity appears on a customer’s network.

“Splunk is a leader in the ingestion, indexing and analysis of machine-generated data,” says a Morningstar stock analysis, adding that “the company will maintain its leadership status for the foreseeable future.”

Splunk has a long streak of growth as it seeks to continue to dominate the enterprise market where machine data is becoming increasingly ubiquitous, impacting every part of a company’s operations, the report adds.

“We consider that more than 90% of Fortune 100 companies use Splunk’s offerings as a vote of confidence in its enterprise product line,” Khan asserts, further noting that “the strong net retention based on the cloud dollar (DBNR) from Splunk has consistently remained above 120%.

With the ability to attract large customers and consistently sell them, Splunk is well positioned for long-term growth.

“Our bullish thesis is reinforced by our belief that Splunk will continue to benefit from secular tailwinds in its end markets and that the company’s sticky product portfolio and entrenchment in its customers’ systems will allow it to create value for shareholders,” says Khan, who pegs the stock’s fair value at US$175 and forecasts annual revenue growth of 20.5% over the next five years.

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