Stocks to buy

All the talk seems to be about AI stocks and not the best cloud computing stocks. Despite the trendiness of the former group, the latter remains quite attractive. Growth rates have been strong and many firms are profitable. Instead of focusing solely on artificial intelligence, investors should be looking for cloud computing stocks to buy too.

Cloud-computing was a key investing theme, but it’s taken a back seat to AI and other trends in recent years. Still, it’s been a consistent and durable trend in tech that’s generated strong returns for investors over the years.

Many mega-cap companies have latched onto the cloud, which helped propel them to trillion-dollar valuations. While these are some of the top cloud computing stocks, many other smaller names with plenty of potential still exist.

Let’s look at a few of these cloud computing stocks for sky-high returns.

Snowflake (SNOW)

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On the heels of Nvidia (NASDAQ:NVDA) reporting blowout earnings, Snowflake (NYSE:SNOW) announced what many investors consider to be a disappointing report. While the company delivered a top- and bottom-line beat, guidance disappointed investors.

Management now expects product revenue to come in at roughly $2.6 billion, below their previous view and consensus expectations of $2.71 billion.

That all said, the growth rate for this firm remains robust while its valuation has come down considerably.

At one point, shares were trading for well over 100 times revenue while sporting a market cap of $130 billion. Now trading near $150 after earnings, the company sports a market cap of less than $50 billion and trades at 19 times this year’s revenue estimate.

Don’t get me wrong, it’s still expensive on a price-to-sales basis. However, the growth rate helps make up for it. Analysts expect 33% to 39% annual revenue growth for the next three years, while the firm pushes into profitability. Last quarter, Snowflake generated free cash flow of almost $300 million, so you can see that there’s potential.

DigitalOcean (DOCN)

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Snowflake weighs in with a market capitalization of about $50 billion, while DigitalOcean (NYSE:DOCN) is much smaller with a market cap of just $3 billion. I really like this firm, as it continues to churn out solid revenue growth while focusing on the bottom line.

There are environments to let costs run and focus on revenue growth and there are times — like lately — to grow revenue as best as possible while keeping costs controlled. DigitalOcean’s management has done a great job at controlling costs while generating solid revenue growth.

What does the company do? “DigitalOcean simplifies cloud computing so developers and businesses can spend more time building software that changes the world.” It caters to small- and medium-sized firms and so far, has generated a pretty impressive growth rate over the years.

As DigitalOcean’s profitability improves, so too does its valuation. When the environment improves, we have to assume the stock will enjoy further upside.

Datadog (DDOG)

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Datadog (NASDAQ:DDOG) has a $30 billion market cap. Because of its size and valuation, many would consider it a high-risk, high-reward stock. However, it’s a name that growth investors should keep on their radar.

After teetering on key support and flirting with making new lows, the stock is up about 50% in just a few weeks. That move came after the firm reported earnings. Specifically, the company delivered an earnings and revenue beat and issued impressive Q2 and full-year guidance.

Despite the big rally though, Datadog remains well off its highs, down more than 53% from the all-time high. If shares were to revisit this level, it would equate to a more than 100% return from current levels.

One cool thing? Analysts expect accelerating revenue growth for each of the next three years. On a non-GAAP basis, the firm’s profitable too, which is an encouraging development.

On the date of publication, Bret Kenwell held a long position in DOCN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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