Missed Out on Amazon? My Best Cloud Stock to Buy and Hold.

shares of Amazon (AMZN -1.65%) have increased by almost 600% in the last 10 years. Most of these gains came after the company began separately disclosing the growth of its Amazon Web Services (AWS) cloud business in 2015.

That was a major turning point for Amazon, as it showed it could subsidize the expansion of its lower-margin e-commerce business with its higher-margin cloud revenue. AWS also remained the world’s largest cloud infrastructure platform by a wide margin, and that scale has allowed the company to consistently generate gains over its closest competitors — Microsoft‘s Azure and alphabet‘s Google Cloud – failed to break even.

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That resilience made Amazon a great player in the secular expansion of the cloud market. It’s likely to keep climbing for the next decade, but with its current enterprise value of nearly $1 trillion, this FAANG stock is unlikely to repeat its past multibagger gains anytime soon.

Still, growth-oriented investors who missed out on Amazon’s gains still have plenty of promising cloud stocks to choose from. My top pick is service now (NOW -3.13%)a cloud software company with an enterprise value of approximately $90 billion.

What does ServiceNow do?

ServiceNow’s cloud-based services help organizations transform their unstructured work patterns into automated workflows. This approach can help a company reduce operational costs, support hybrid and remote workers, and grow its business more efficiently.

At the end of 2022, the company had over 7,700 customers, including about 85% of the Fortune 500. ServiceNow’s business is well insulated from macroeconomic headwinds, as companies often turn to its cost-cutting tools during economic downturns. But it also thrives in a stronger economy when those companies expand again.

How fast has ServiceNow grown?

Between 2017 and 2022, adjusted revenue grew from $1.93 billion to $7.54 billion, at a five-year compound annual growth rate (CAGR) of 31%. Adjusted gross margin also increased to 86% from 85%, while free cash flow margin increased to 30% from 25%.

Unlike many other high-growth cloud companies, ServiceNow has consistently remained profitable on both generally accepted accounting principles (GAAP) and non-GAAP metrics. Annual non-GAAP net income has had a CAGR of 48% over the last five years.

ServiceNow’s growth was held back by unfavorable exchange rates last year, but the company still expects its subscription revenue (which accounts for the bulk of its top line) to grow 23.5% on a currency-neutral basis this year. The company is also targeting revenue of over $16 billion in 2026, which means its revenue will grow at a CAGR of at least 21% over the next four years.

ServiceNow competes with other digital transformation players such as Foreclosure (CRM -3.10%), Atlasian (TEAM -8.36%)And working day (WTAG -1.76%), but its rising gross margins and high 98% renewal rate by the end of 2022 suggest it still has a lot of pricing power in its niche of digital workflow services. The company also ended the year with 1,637 customers with average contract values ​​over $1 million — a 22% year-over-year growth.

How much bigger could ServiceNow get?

ServiceNow is trading at 10 times this year’s revenue. Salesforce, which faces more headwinds and is expected to grow more slowly than ServiceNow for the next few years, is trading at five times this year’s revenue.

Atlassian, which generates comparable revenue growth but isn’t profitable on a GAAP basis, trades at 13 times this year’s revenue. Workday, which is growing more slowly and is also unprofitable under GAAP, trades at six times this year’s revenue. In short, ServiceNow isn’t cheap right now, but it seems reasonably priced compared to its closest cloud-based competitors.

If ServiceNow’s revenue continues to grow at a 20% CAGR over the next 10 years, it could generate about $47 billion in revenue by 2032. If it’s still trading at 10 times sales by then, it could be worth $470 billion — the equivalent of a five-bagger to capitalize on its current enterprise value. Even if the price-to-sales ratio drops to five, it would still be worth around $235 billion.

Those estimates might be overly conservative, as they don’t account for ServiceNow expanding its ecosystem through more acquisitions. Buying more companies or launching other services on top of its solid foundation of digital workflow services could eventually turn it into a more diversified cloud-based software giant like Salesforce.

So if you’re looking for a great cloud stock that you can just buy and forget about for the next 10 years, I think ServiceNow is for you.