In this article we list the top 10 cloud computing stocks to buy according to hedge funds. Click to skip ahead and see the top 5 cloud computing stocks.

What are the best cloud stocks to buy today? In this time of uncertainty characterized by volatile market movements, economic contraction, and spiraling unemployment, finding stocks that would guarantee strong returns, let alone preservation of capital, seems like a herculean task. Some investors might think that the stock market is acting irrationally and puzzled by the quick recovery of stock prices since the end of March. The market’s movements isn’t far away from economic realities. Economic reality is that long-term real interest rates are negative, the Federal Reserve is flooding the market with cheap credit, and the current economic slowdown is temporary.

We are in the middle of a historic offline to digital transformation. Companies like Gap Inc (GPS) are closing the majority of their online stores and switching to digital. This is the perfect environment to buy cloud computing stocks which aren’t negatively affected by the present economic predicament. If there is anything we have learnt from the coronavirus induced lockdowns, it is that more than ever, we would need technology to meet our existential needs.

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In order to compile this list, we started with the entire holdings of the Global X Cloud Computing ETF (CLOU). According to its website, the ETF "seeks to invest in companies positioned to benefit from the increased adoption of cloud computing technology, including companies whose principal business is in offering computing Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), Infrastructure-as-a-Service (IaaS), managed server storage space and data center real estate investment trusts, and/or cloud and edge computing infrastructure and hardware". Right now there are 36 stocks in this cloud computing ETF. We ranked these 36 stocks by the number of hedge funds with bullish positions in these stocks and presented the top 10 stocks below. Our top 10 list is significantly different than CLOU's top 10 list. For example, Zoom Video Communications, Inc. (NASDAQ:ZM) is the #1 stock in CLOU's portfolio and has a 10.5% weight whereas it ranked 13th in our list and failed to break into the top 10.

We use hedge fund sentiment as a litmus test to gauge the profitability of potential investment ideas and to predict the trajectory of market. Research carried out by Insider Monkey has shown that a select group of hedge fund holdings have consistently outperformed the S&P 500 ETFs. For instance, our monthly newsletter's portfolio of stock picks beat the market by more than 66 percentage points since March 2017 (see the details here). As such, hedge fund sentiment is undoubtedly a useful indicator that investors should pay attention to. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Based on hedge funds sentiment, we present the top 10 cloud computing stocks among the 800+ hedge funds tracked by Insider Monkey.

10. Dropbox, Inc. (DBX)

There were a total of 51 hedge funds with bullish DBX positions at the end of June. In contrast Zoom Video had a total of 48 hedge funds. We took a detailed look at Dropbox in this article recently. Compared to most other cloud computing stocks, Dropbox looks like a deep value stock trading at a forward PE multiple of 22. Low growth consumer staples companies like Procter & Gamble trade at higher multiples than Dropbox.

9. Shopify Inc. (SHOP)

There were a total of 57 hedge funds with bullish SHOP positions at the end of June. Now Shopify trades like a high growth cloud computing stock with a forward PE ratio of 435. Shopify also has a current Price/Sales ratio of 57. Shopify investors clearly believe that this company will be able to growth its revenue by 10x over the next few years. A large number of hedge funds are bullish and expect that Shopify will become a credible Amazon challenger (see this article). Billionaire Stephen Mandel's hedge fund has $1.6 billion invested in Shopify. We have to note that not everyone is thrilled about Shopify's prospects. McLain capital expressed its skepticism in this article.

8. Twilio Inc. (NYSE: TWLO)

Twilio Inc. (NYSE: TWLO) is one of the top picks in CLOU's portfolio. It is also extremely popular among hedge funds. There were a total of 66 hedge funds with bullish positions totaling more than $3.7 billion at the end of June.

Twilio’s (NYSE:TWLO) second-quarter performance is likely to have benefited from an increasing clientele, which increased by 11,000 new clients in the last quarter, taking the company's total active customer count to 190,000. The company’s expanding foothold among leading enterprises is also likely to have been a key catalyst for this growth. Twilio’s solid efforts to fortify its global footprint also has attracted the attention of 52 hedge funds who have retained the stock in their portfolios during the first quarter. So, clearly hedge funds are flocking into this stock.

SCGE Management was the largest shareholder of Twilio Inc. (NYSE:TWLO), with a stake worth $611 million reported as of the end of June. Trailing SCGE Management was Foxhaven Asset Management, which amassed a stake valued at $534 million. Generation Investment Management, Tiger Global Management LLC, and Whale Rock Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Foxhaven Asset Management allocated the biggest weight to Twilio Inc. (NYSE:TWLO), around 17.9% of its 13F portfolio. Toronado Partners is also relatively very bullish on the stock, earmarking 7.4 percent of its 13F equity portfolio to the stock.

7. Workday Inc (NASDAQ: WDAY)

Workday Inc (NASDAQ: WDAY) ranks seventh in our list with a total of 73 bullish hedge fund positions. The company has a market capitalization of $52B. Miller Value Partners talked about Workday in its Q2 2020 Investor Letter, a copy of which you can download here. Here is what the letter said:

“Workday is one of the “software as a service” (SAAS) leaders. We looked at it last year as we did work to understand the space. At the time, we didn’t think it offered enough upside, but in the market selloff, it went from $200 to $107. While we didn’t catch it at the lows, we bought it in the $150s where we thought it still offered 50% upside. For a name this kind of market loves, we thought this was quite attractive. Many of its peers had already recovered all of their lost ground but the market was worried about near-term weakness from customers pushing out tech projects. This created a great buying opportunity for us. Workday leads human resource management cloud solutions and is nicely growing its newer financial services offering. It has a sizeable total addressable market, especially relative to its current market cap and revenues. At 9x EV/Revs and 40x EV/EBITDA on next year’s numbers, it’s not cheap on the surface, but we think it’s reasonably priced for a leader with good growth prospects that should be able to compound capital for a long time.”

6. Salesforce.com Inc (NASDAQ:CRM)

Salesforce.com is a top 10 stock both in CLOU's portfolio and our list. There were a total of 107 hedge funds with CRM positions at the end of June. One out of every 8 equity hedge funds had a bullish position in CRM. Vulcan Value Partners recently talked about CRM in its Q2 2020 investor letter, a copy of which you can download here. Here is what the letter said:

"“Salesforce.com Inc. is the dominant provider of customer relationship management (CRM) software and technology. Over the years, Salesforce has expanded its services to capture the entire lifecycle of a customer, including the ability to integrate third-party applications. Salesforce has high retention rates, pricing power, a large and growing addressable market, high free cash flow, and a competitive moat. Salesforce is spending aggressively to capture a larger share of its rapidly growing total addressable market. As a result, we believe that Salesforce’s value should compound through continued investment in top line growth and margin expansion over time. The recent effects of COVID-19 have only improved its prospects and future returns.”

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Disclosure: None. This article is originally published at Insider Monkey.