Cloud computing is the backbone of digital transformation in modern enterprises. It enables businesses to access, store and process data and applications over the internet, rather than on-premises servers. Cloud computing offers many benefits, such as scalability, flexibility, cost-efficiency and security. However, not all cloud computing businesses have been successful in 2023. Not only is the cloud computing market highly competitive and dynamic, but some companies will struggle with acquiring new customers or upselling to existing ones. Other cloud computing stocks have ballooned in valuation, making them ample targets for a devaluation or sell-off scenario.
Thus, below are three cloud computing stocks investors should consider dumping before they plummet in value.
Cloud Computing Stocks to Dump: Datadog (DDOG)
Datadog (NASDAQ:DDOG) is a cloud-based monitoring and analytics platform that helps customers track the performance and health of their applications, infrastructure and services. Driving Datadog’s strong revenue growth throughout the years has been the rise of SMBs (small and medium-sized enterprises) and large enterprises utilizing cloud-based applications and services. Datadog has also successfully tailored its solutions for businesses in multiple industries and industry sub-verticals. As a result, the infrastructure monitoring solutions firm has developed a diversified product portfolio and acquired a loyal, growing customer base of 23,200 enterprises as of June 30th.
However, Datadog’s management team, in their second quarter earnings print, announced a cut to Q3 and full year guidance due to what they described a difficult selling environment in the short run. Lowered guidance should spook investors who have largely rallied behind Datadog’s shares due to the cloud company’s robust top-line growth numbers. Without robust growth, Datadog’s lofty valuation, which already trades around 62.7x forward earnings, makes little sense.
Datadog’s stock has already been hit with the recent macro volatility of this month, but the stock could plummet further as investors re-access valuation multiples as well as the company’s near-term growth prospects. If you are looking to dump your cloud computing stocks, start here.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) is a software platform that essentially serves as a cloud-based data warehouse allowing customers to store and analyze large amounts of data. Similar to Datadog, Snowflake has been able to grow its business rapidly because of the higher demand for cloud products and services in the past few years. In the beginning, Snowflake essentially revolutionized data warehousing, most of which used to be on-prem, by establishing a cloud network around data storage and charging reasonable prices based on utilization. From 2019 to 2021, Snowflake was able to grow revenue in triple-digit YoY growth rates.
These days, unfortunately, Snowflake has definitely hit some roadblocks, and revenue growth rates have plummeted far from their triple digit highs. The reason has not only to do with newfound difficulties in customer acquisition but also existing customers attempting to lower their data storage bills by deleting “stale and less valuable” data. As businesses across the globe continue to scrutinize costs as interest rates stay elevated amidst a cloudy macroeconomic environment, it is difficult to see how Snowflake will return to its glory days of being a high-growth SaaS company.
Snowflake’s forward P/E multiple has been stretched beyond sanity, and further price pressure could be imminent.
Fastly (FSLY)
Fastly (NYSE:FSLY) is the final cloud computing stock investors should do well to avoid. It is a cloud-based “edge computing” platform that provides content delivery network (CDN) and security services to customers such as Shopify (NYSE:SHOP), Spotify (NYSE:SPOT), and ByteDance’s TikTok. For those unaware, having a CDN helps customers to affordably store content and data on servers. Because a CDN is a “distributed network,” users of a website or app can quickly pull up content because they would have access to the closest server.
Fastly has benefited tremendously during the pandemic from the surge in online activity, but the cloud platform also depends heavily on a few large customers for its revenue. In 2020, when the Trump Administration was mulling over a TikTok ban, Fastly saw a major pullback in the use of its services by ByteDance and its shares suffered as a result. Fast forward to the current day, the company is experiencing difficulty in scaling amidst the current business environment. Fastly only expects to, at best, generate $500 million in revenue in 2023, which would represent a 12.9% YoY decline in sales.
Given valuation multiples have already reached astronomic levels, Fastly’s share value could be due for a severe in the near-term.
On the date of publication, Tyrik Torres did not have (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.