Last year was terrible for some of the best cloud computing stocks, and for the Cloud Czars whose cash flow built it. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, GOOG), Amazon.Com (NASDAQ:AMZN), and Meta Platforms (NASDAQ:META) combined to lose trillions of dollars in market cap. Meta lost more than half its value, and Amazon nearly that. Even Apple lost one-quarter of its value, its market cap falling below $2 trillion.
You can blame the Fed or the Czars’ own mistakes. Apple became dependent on China. Microsoft saw its Windows franchise crumble with PC sales. Alphabet lost billions of dollars on free services like Gmail. Amazon found itself winning a market with Alexa but failed to profit from it. Meta saw its Facebook franchise collapse while seeking to build a metaverse.
In 2023 investors are looking beyond the Czars for cloud profits. Equinix (NASDAQ:EQIX) and other data center REITs offer dividend income and a home for companies seeking independence from expensive cloud services. Palo Alto Networks (NASDAQ:PANW) and other security companies offer the one service every company doing business in the cloud online must-have.
None of this means the Czars won’t come back. I own shares in most of them. At the end of this gallery, you’ll see my favorite for 2023 profit. But if you’re going to make big money in tech markets, you always look for the next big thing.
Recently, 37 Signals CTO David Hansson said his company spent $3.2 million on Amazon Web Services last year. The bills moved him to quit the cloud. He bought Dell Technologies (NASDAQ:DELL) hardware and promised savings would follow.
But while you can quit the cloud, you can’t quit the cloud world. A data center still needs cloud connections and a secure location. That means 2023 should be a great year for companies like Equinix (NASDAQ:EQIX).
Equinix is a Real Estate Investment Trust (REIT) specializing in data centers. It builds these data centers with debt and pays out profits in dividends. The data centers are rented to companies like 37 Signals and include networked connections to major clouds. Clients put their servers in the space for the same reason they rent offices downtown.
Equinix is not a cheap stock. The current price-to-earnings ratio is 95, and the current dividend yields just 1.7%. But it is a long-term winner, with 20% per year over the last five when capital gains are factored in. The industry has been consolidating around Equinix and rival Digital Realty Trust (NYSE:DLR), another stock worth considering.
Palo Alto Networks (PANW)
Wars and cybercrime make security a priority for every customer, even one built into the cloud. The leader in the space is Palo Alto Networks (NASDAQ:PANW). Palo Alto is down 16% over the last year, roughly in line with the S&P 500. It was recently trading at $140. That’s 8 times last year’s revenue, and it loses money regularly. But revenue has doubled since 2020, and it has averaged gains of 35% per year over the last five years.
Palo Alto’s biggest problem is that leadership is expensive. About one-quarter of revenue was spent on research last year. There are always new breakthroughs being announced, new start-ups with new approaches, and new more being funded. It’s not easy being the King of Security. You must run fast to keep your place.
Acquisitions are also necessary to stay ahead, the most recent being Cider Security. New infrastructure is needed to manage it all. Palo Alto is known for its Prisma Cloud, aimed at preventing cyberattacks in the cloud. It is also led by Nikesh Arora, formerly number two at SoftBank (OTCMKTS:SFTBY). A fall of 18% in December makes Palo Alto’s rich valuation look more attractive.
When the tech market comes back, Palo Alto and other security stocks will be in the thick of it. So will rivals like Fortinet (NASDAQ:FTNT), Crowdstrike (NASDAQ:CRWD), and Splunk (NASDAQ:SPLK).
The Internet isn’t just for people anymore. It’s for companies like PTC (NASDAQ:PTC).
Most Internet traffic today is already untouched by human hands. It moves from sensors to servers and back again, appearing to managers only in the form of online reports. It’s on engines warning of maintenance issues before things break. It’s all part of what I call the Machine Internet, a trend I’ve been studying for 20 years. In the past, I called these “always on” technologies, and analysts called them the Internet of Things. We’re now moving toward connecting things into systems to run factories, hospitals, and entire cities.
PTC has been in this game from the beginning, when the niche was called Product Lifecycle Management, back in the 1990s. Through Rockwell Automation (NYSE:ROK), which took a stake of nearly 9% in 2018, PTC has been building out the portfolio, scoring double ROK’s gains. Over the last year, the stock is up 18%, and the market cap is now $14.2 billion on sales of almost $2 billion. Of that, 15% became net income.
This stock is still not cheap but the best growth stories never are. I believe the Machine Internet is one of the big trends of this decade. You might also look to Cadence Design Systems (NASDAQ:CDNS), which is redesigning how chips are made for this new world.
GE HealthCare (GEHC)
The Machine Internet is becoming an Internet of Systems.
A warehouse is a system. A factory is a system. A city is a system. A hospital is a system.
GE Healthcare (NASDAQ:GEHC), which has just been spun out of General Electric (NYSE:GE), is going to help build this new systems Internet. GEHC is already a leader, alongside Siemens (OTCMKTS:SIEGY), in producing the big scanners that are at the heart of hospitals today. These systems are now being used routinely. (I was tossed in one for a kidney stone last year.) There are innovations happening all the time. Lots of new machines mean lots of opportunities to build-in connectivity.
GE, like me, has been betting on this Industrial Internet for decades and failing to see results from it. GE was way too early, it was too unfocused, and it was far too arrogant.
Now it’s ready to deliver results, in the form of savings for hospitals and profits for GEHC. The GE breakup has created the humility necessary to move forward. The sunk cost of machines, and their necessary connections to patients and doctors, require these connections. It’s then a short step from scheduling the machines to the people.
Right now, however. GE Healthcare isn’t priced like a growth stock. With a market cap of $29 billion and a price-to-earnings ratio of just 15, it’s being priced like a value stock. The company estimates it will report $2.6 billion of earnings on $18.3 billion of revenue for all of 2022. I also like McKesson (NYSE:MCK), the hospital software company, here.
If I’m to place a bet on any of the Cloud Czars for 2022, it’s Amazon (NASDAQ:AMZN).
First, because Amazon fell harder in 2022 than any other Czar not named Meta Platforms, the company is not broken. Amazon Web Services dominates in re-selling cloud, contributing nearly $5 billion of net income on revenue of $16 billion in the third quarter alone. Its media operations, Amazon Prime Video and Freevee, are set to dominate as streaming shakes out. The Kindle book operation and Fire TV already dominate their niches. Profits will grow, in contrast to its streaming rivals.
There are two problem areas. First, the store needs to be run like a store, with its own CEO and a logistics expert below them. Right now Amazon’s store is being beaten by Walmart (NYSE:WMT), which copied most of Amazon’s innovations while adding in-store pick-up and local deliveries.
The second problem is Alexa. Alexa won the voice control wars, but it doesn’t make any money so it can’t be sold. Its use cases are limited to music and cars. But there is an enormous user base for Alexa. It’s too big to kill. A lot of investors are put off by these problems, along with a PE of 87. But right now you’re paying barely two times the revenue for a stock that dominates its markets, including the world’s largest technology market.
I’ll admit that I should have sold out of Amazon a year ago, taken my profits, and waited for the smoke of the tech wreck to clear. But if I have $100 in cash today, this is the first place I put it. The second would be Alphabet (NASDAQ:GOOGL, GOOG).
On the date of publication, Dana Blankenhorn held positions in AMZN, GOOGL, MSFT, and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. His 10th novel is The Time Tunnel, now available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.