In the face of immense economic uncertainty surrounding the radical changes in U.S. trade policy under President Trump, investors are seeking safe havens in the market. While there is no such thing as a perfectly safe investment, cloud and software stocks like Alphabet and CrowdStrike could be the safest place to invest.
Why Cloud and Software Stocks are a Better Bet
Cloud and software companies primarily sell services rather than physical goods, and services are not subject to tariffs. As a result, they are theoretically better positioned in a trade war scenario. According to Dan Ives at Wedbush, cloud and software stocks like Alphabet and CrowdStrike could be the safest place to invest.
Alphabet: The Leader in Digital Advertising and Cloud Services
Alphabet subsidiary Google has two important growth engines in digital advertising and cloud services. It is the largest ad tech company in the world because of popular web properties Google Search and YouTube. Despite losing share across the open internet, its search advertising market share is forecast to increase modestly through 2026 due to strength in generative artificial intelligence (AI), according to eMarketer. In addition, Google is the third largest public cloud behind Amazon and Microsoft, with 12% of infrastructure and platform services spending in Q4 2024, up from 11% in Q4 2023, according to Synergy Research. While unlikely to catch the leaders, Google could continue winning market share as demand for AI increases. Forrester Research recently recognized its leadership in AI foundation models and AI platforms.
Strong Financial Results
Alphabet reported solid financial results in the first quarter, crushing estimates on the top and bottom lines. Revenue rose 12% to $90 billion on particularly strong sales growth in cloud services. Operating margin expanded 2 percentage points, and GAAP earnings rose 49% to $2.81 per dilute share. CEO Sundar Pichai attributed the strong results to momentum with AI products across the advertising and cloud businesses.
Reasonable Valuation
Wall Street expects earnings to increase at 7% annually through 2026. That makes the current valuation of 18 times earnings look reasonable. However, analysts are likely underestimating the company. Ad tech and cloud spending are forecast to grow at 14% annually and 20% annually, respectively, through 2030. Additionally, Alphabet beat the consensus earnings estimate by an average of 14% in the last six quarters, according to LSEG.
Buy with Confidence
Investors should feel comfortable buying a small position in this AI stock at its current price.
CrowdStrike: The Leader in Endpoint Security
CrowdStrike specializes in cybersecurity, with a platform that consolidates 30 software modules addressing several end markets. The company is a leader in endpoint security, protecting endpoint devices like desktops, laptops, and servers. It also has a strong presence in other verticals, including cloud security, identity protection, and security information and event management (SIEM).
Competitive Advantage
CrowdStrike’s leadership in endpoint security, coupled with its strong presence in other security end markets, affords the company an important competitive advantage: it has a tremendous amount of data. CEO George Kurtz says CrowdStrike has the “richest data” in the industry, which makes its AI models uniquely effective in stopping attacks.
Disappointing Guidance
Management gave disappointing guidance that implies earnings will decline 14% in the current fiscal year. However, this reflects “one-time upfront investments” in areas like marketing and AI product development. The company expects returns on those investments in the second half of the year, and earnings should return to growth next year. Investors need to keep this in mind when the company reports financial results in the coming quarters.
Conclusion
While no investment is perfectly safe, cloud and software stocks like Alphabet and CrowdStrike could be the safest place to invest in a volatile market. With their strong growth engines and competitive advantages, these companies are well-positioned for long-term success. Investors should consider buying a small position in these stocks at their current prices.
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