3 Stocks to Watch as the Economy Shifts to the Cloud

Key Points

• As the global economy heads into the digitized cloud, there are three stocks investors shouldn't ignore in the coming years for upside. 
• While their valuations may seem higher now, markets are willing to pay a premium for exposure to the secular trend of cloud computing.
• Wall Street analysts see the upside in each, so they've boosted their EPS and price target forecasts higher.

Investors who want to get on the train for the next big waves of innovation and adoption in the global economy have a special opportunity today. The technology sector is carrying some of the biggest and most powerful stocks that will likely carry the global economy onto the cloud, boosting GDP and productivity as they do. Those with a long enough time horizon for investing should watch closely.

Stocks like Microsoft Inc. NASDAQ: MSFT, Amazon.com Inc. NASDAQ: AMZN, and especially Alphabet Inc. NASDAQ: GOOGL come to mind as the perfect way for investors to gain exposure to these broader trends. While most of the market remains hyped up about semiconductor stocks like NVIDIA Co. NASDAQ: NVDA and their artificial intelligence capabilities, most of the growth could be coming from the cloud computing space instead.

Despite recent sell-offs in the S&P 500 and the overall technology sector, investors should now consider the fundamentals behind these companies more than ever, especially as the global economy starts going online and into the so-called cloud. First, a brief overview of what is happening to the gross domestic product is in place to open up the curious appetite.

Innovation Fuels Productivity: Why Wall Street Favors These Stocks

When people took pictures with an old Kodak camera, they had to pay for not only the roll of film to capture moments but also someone to develop these images in a red room. This addition of services boosts GDP but not productivity.

Today, people with smartphones don’t have to think about developing images. Still, they need to consider storage (like the rolls that had to be bought before). This is where the concept of cloud storage comes into play. While it may not add as much to GDP as developing images did, it frees up some time to be more productive in pursuit of better things.

Investors can multiply this effect throughout any industry, from business services to the manufacturing sector. The wave of artificial intelligence and cloud computing is making the United States much more productive. This is why Wall Street analysts hold these stocks in high regard.

Microsoft’s High Valuation Signals Strong Upside Potential

For Microsoft, even though the stock trades at a price-to-earnings (P/E) ratio of 36x, analysts at Wedbush still see a $550 price target for Microsoft stock. To prove these valuations right, the stock must rally by as much as 34% from where it trades today.

While NVIDIA took a dive after missing the high expectations the market had placed on the stock, investors should be surprised to see that the short interest for Microsoft stock declined by 5.2% over the past month. Bears understand that markets are willing to pay a premium for good companies, especially during uncertain times.

Investors like Ken Fisher, known for his value and macro approach, understand that Microsoft’s high valuation is only a testament to the potential upside it can deliver as the economy becomes digitized. Fisher owns roughly 26.6 million shares after adding in June 2024.

Through Microsoft Azure and the classic Office offering, Microsoft is well-positioned to ride some of the growth prospects this new trend promises investors.

Amazon’s Dual Strength: Consumer Play and Cloud Dominance

Wall Street analysts now forecast up to 20.2% earnings per share (EPS) growth for Amazon stock in the next 12 months, impressive considering the current state of the U.S. consumer facing inflation and higher costs of living. The thing is, Amazon is much more than just a consumer play.

Through Amazon Web Services, the company is also tapping into the growth of America’s medium—to large-business activity. It has now become the platform of choice for some entities to develop their cloud and software presence. Analysts at JMP Securities have something to say about this fact.

They call for a 50.1% upside from where the stock trades today, as they placed a $265 price target on Amazon stock as recently as September 2024. Interest rate cuts promised by the Federal Reserve (the Fed) are also a catalyst for investors to consider, as businesses will have larger budgets and new demand, which are reasons to consider Amazon’s services.

Google’s Cloud Growth and Ad Revenue Signal 40% Upside

Advertising, prospecting, meetings, and customer relations are also embracing the cloud computing trend. Alphabet, better known as Google, is one key player in this realm. Higher valuations might be a concern—or even a risk—for investors, but here's the market's view.

Willing to pay a premium valuation for a stock typically has a good reason, and Wall Street analysts now forecast up to 13.2% EPS growth for Google stock in the next 12 months, helping those at BMO Capital Markets land on a $222 price target to call for 40.8% upside from where the stock trades today.

Keeping interest rate cuts at the forefront of investors' minds, investors can see how larger advertisement budgets can make their way into Google's network through internet searches and YouTube ads alike. As the stock now trades at only 83% of its 52-week high, investors have plenty of room to catch up to Alphabet's previous highs.