Two for the Cloud

08/11/2015 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

The divergence continues, with the broad market looking increasingly weak. So what comes next? asks growth stock expert Mike Cintolo, editor of Cabot Top Ten Trader.

Optimists may claim that low interest rates mean there are no attractive alternatives to stocks, but pessimists will note that divergences such as these seldom end well.

Thus our market monitor remains unchanged, in slightly positive territory. You can still make money in this market, but more than ever, skillful stock picking, combined with proper entry timing, is critical.

Here’s two new recommendations, both firms that operate in the cloud.

Equinix (EQIX)

It’s fashionable these days to say that the Internet lives in a cloud, but the hard truth is that the Internet depends on servers and those servers are only useful if they remain powered up by a constant source of electricity, as well as cool, secure, and—critically—connected to the Internet.

Equinix is the market leader in that industry, with roughly 8% of the market. It operates 105 data centers that cover the world.

The company just released an excellent second quarter earnings report, beating analysts’ expectations and increasing projections for the quarters ahead.

Interestingly, Equinix (which owns a fair amount of real estate) converted to a REIT structure at the start of this year and thus is committed to paying out a steady stream of dividends, which is both unusual and reassuring for a fast-growing technology company. Currently, the stock yields 2.4%.

ServiceNow (NOW)

ServiceNow, the California-based developer of cloud-based IT software, is no stranger to us, having appeared in our newsletter eight times since its 2012 IPO.

The company’s software is designed to make a company’s IT more reliable, more transparent, and easier to manage, with automated workflow and improved scalability in every department of a subscriber’s company.

ServiceNow has enjoyed many years of strong revenue growth—74% in 2013 and 61% in 2014—and is expected to turn profitable in 2015, with EPS estimates for 2016 up 125%.

It’s those projected earnings that are keeping investors interested, increasing institutional sponsorship to over 900 during the most recent quarter.

Over 80% of ServiceNow’s revenue comes from subscriptions, with the rest coming mostly from professional services, resulting in an excellent follow-on revenue stream. With permanent profitability in its sights, ServiceNow is ready to deliver on its promise.

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