Cloud Hosting

Cloud-based companies that sell to businesses are dealing with customer bases that are looking for ways to cut costs. Hiring freezes, layoffs, and other cost-cutting measures are becoming commonplace. For cloud infrastructure and software providers, this means customers are taking a hard look at their current suppliers and potentially putting the brakes on adopting new products.

Growth for cloud companies in general is going to be slower overall this year than it was during the pandemic. But that doesn't mean there aren't good opportunities for investors. Two cloud companies that have managed to maintain solid growth rates despite a tough economy are cloud infrastructure provider DigitalOcean (DOCN -2.25%) and data platform Snowflake (SNOW 0.34%).

Here's why investors should consider these fast-growing cloud stocks.

There's a big market for simple and affordable cloud infrastructure. Developers and small businesses often don't have the time, resources, or desire to wade through the mess of options, features, and products on a platform like Amazon Web Services. And they certainly don't want a surprise cloud bill, the result of opaque and hard-to-predict pricing schemes.

DigitalOcean puts simplicity first, with just enough products and services to handle the needs of its customers. There's no laundry list of overlapping and redundant products, and pricing is easy to understand.

This simplicity has resonated with DigitalOcean's customers. Revenue jumped 34% year over year in 2022 thanks to a combination of new customers and increased spending from existing customers. The company's net dollar retention rate stood at 112% in the fourth quarter, and the average monthly revenue per customer shot up 22% to just over $80.

DigitalOcean's growth is expected to slow a bit this year, not surprising given the state of the economy. The good news is that the company still sees revenue rising about 23% from 2022. That's nothing to sneeze at, and growth should reaccelerate once the economic environment shifts in a more favorable direction.

One part of DigitalOcean's growth strategy is to use acquisitions to bolster its platform, all the while keeping simplicity front and center. The company acquired Nimbella in 2021 and leveraged that company's tech to launch a serverless functions product; it acquired managed cloud hosting provider Cloudways in 2022 to expand its portfolio of high-value and low-maintenance solutions; and it acquired upstart SnapShooter in January to offer its customers a dead-simple backup product and expand its data-related revenue.

DigitalOcean has been successful because it does things differently than the cloud giants. It doesn't try to offer every imaginable service, and it doesn't go after every type of customer. Instead, the company is laser focused on the basic building blocks of cloud computing and offering customers easy, managed, no-fuss solutions. That strategy is working, and while growth is temporarily slowing down, DigitalOcean is on a path to become a much larger company over the next decade.

Large enterprises often have critical data spread across on-premises infrastructure and multiple cloud platforms. That data comes in different flavors, some structured, some semi-structured, and some entirely unstructured. Making the best use of this data requires a platform capable of ingesting, aggregating, and analyzing all of it. That's Snowflake in a nutshell.

You only have to look at Snowflake's financial performance to understand how popular the platform has become for enterprises. Revenue soared 54% year over year in the fourth quarter, and Snowflake's net revenue retention rate stood at an impressive 158%. Once a customer adopts Snowflake's platform, they tend to rapidly grow their spending.

Snowflake has nearly 8,000 customers, and 330 of them have spent at least $1 million over a 12-month period. Snowflake does expect growth to slow this year as customers react to a tough economic environment, but the company is still calling for a 40% rise in product revenue for the current fiscal year. Other subscription software and cloud companies are being hit much harder by the macroeconomic environment, a testament to the stickiness and importance of Snowflake's platform.

Snowflake is an expensive stock to be sure. Its forward price-to-sales ratio sits around 17, and the company hasn't yet produced profits according to generally accepted accounting principles (GAAP). But free cash flow is squarely positive, and the company is confident enough to roll out a $2 billion share buyback program.

If you're looking to invest in the cloud and want the absolute best growth prospects available, Snowflake is the obvious choice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in DigitalOcean. The Motley Fool has positions in and recommends Amazon.com, DigitalOcean, and Snowflake. The Motley Fool has a disclosure policy.

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2 Cloud Stocks That Are Still Growing Fast - The Motley Fool