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Investing in the Cloud: Consider Cloudflare and Digital Ocean

Cloud-software growth stocks have been a bright spot in an uncertain market. Investors might look closely at Cloudflare and Digital Ocean.

Cloud-software growth stocks have been a bright spot in an uncertain market.

Two in particular -- Cloudflare  (NET) - Get Cloudflare Inc Class A Report and DigitalOcean  (DOCN) - Get DigitalOcean Report -- continue to attract buyers and could be in for even more upside.

Given secular growth trends like businesses moving their workloads to the cloud and increasing demand for edge computing, cloud computing could be one of the tech sector's most lucrative areas during the next decade, 

There’s a lot for investors to like about Cloudflare and DigitalOcean. Let’s take a deeper look at what makes them stand out.

Cloudflare

After a late September decline, the stock of Cloudflare, which might just be the market leader in the cloud software space, has essentially gone parabolic.

The San Francisco company, a global cloud-services provider offering products that can strengthen network security and improve the performance of internet applications, has delivered revenue at a compounded annual growth rate of 50% from fiscal 2016 through fiscal 2020.

What really helps Cloudflare stand out in the crowded software growth space is how the company uses edge computing.

Cloudflare defines this as “a networking philosophy focused on bringing computing as close to the source of data as possible in order to reduce latency and bandwidth use. 

"In simpler terms, edge computing means running fewer processes in the cloud and moving those processes to local places, such as on a user’s computer, an [internet of things] device, or an edge server.”

Companies can take advantage of Cloudflare’s products and services without having to add any new hardware or update code. That means it’s one of the most convenient ways to instantly improve the performance of their internet applications.

Websites powered by Cloudflare have all web traffic sent through the company’s intelligent global network. The company claims to block an average of 87 billion cyber threats each day.

About a fifth (19%) of the Fortune 1000 are currently using Cloudflare to power their internet requests.

TheStreet Recommends

While the company is still working toward profitability, the recent price action tells investors that institutional investors are scooping up the shares.

The stock has more than doubled this year and leaped 60% this month. Cloudflare rose 7.8% on Monday after it unveiled a collaboration with Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report and other search-engine providers to provide more timely and relevant search results. 

After the rally, investors interested in adding exposure to one of the top cloud software names should keep an eye on Cloudflare for pullbacks or consolidation.

How the Long Tech Rally Evolved

DigitalOcean 

Digital Ocean is another cloud software stock that's more than doubled -- this time since making its public debut in April.

The New York company has a rapidly growing customer base in a niche area of the cloud industry.

Unlike massive cloud platform providers like Amazon  (AMZN) - Get Amazon.com, Inc. Report Web Services and Microsoft Azure, DigitalOcean focuses on providing infrastructure and platform tools for small and medium-sized businesses, an underserved area of the market.

These smaller companies don’t necessarily need all the expensive and complicated bells and whistles the larger providers offer. 

Digital Ocean instead offers simplified cloud-based products -- including droplets, databases and app platforms -- at reasonable and transparent prices, which are a huge draw for almost any business today.

In Q2, DigitalOcean surpassed 600,000 total customers, up 9% year over year. Companies are sticking with Digital Ocean's offerings, given that the company’s net dollar retention rate more than doubled (up 113%) during the second quarter.

Also worth noting: DigitalOcean's revenue growth is accelerating while its net losses are narrowing.

With annual recurring revenue growing 25% or more over the past four quarters and recently boosted full-year guidance, investors would do well to research and review DigitalOcean.