We recently compiled a list of the Worst Cloud Stocks To Buy According to Short Sellers. In this article, we will look at where Rubrik Inc. (NYSE:RBRK) ranks among the worst cloud stocks to buy according to short sellers.
Cloud computing refers to the use of remote servers, typically accessed via the Internet, to store, manage, and process data. A segment of the broader IT services industry, the cloud computing market was valued at $480 billion in 2022, and despite its size, it is projected to grow at a compound annual growth rate (CAGR) of 17%, reaching an estimated $2.2 trillion by 2032 (according to estimates from Precedence Research). Knowing this, it’s no surprise that many of the hottest tech stocks from 2019 to 2021 were tied to cloud computing, with ETFs like the First Trust Cloud Computing ETF surging 71.84% over the past five years.
The largest cloud computing segment is Software as a Service (SaaS), which generates the most revenue in the cloud market and has become the standard for delivering enterprise applications. Common uses of SaaS include customer relationship management, analytics, and artificial intelligence software. The next layer, Platform as a Service (PaaS), provides customers with a platform for application development. Lastly, Infrastructure as a Service (IaaS) offers customers off-site resources such as storage, servers, virtual machines, and networking.
Amid the disruption and excitement surrounding generative AI (GenAI), cloud service providers (CSPs) enable businesses to engage with customers and operate innovatively. With AI Ops and AI tools offered by CSPs, businesses can transform proof-of-concept ideas into production-ready solutions, delivering personalized recommendations, optimizing supply chains, and enhancing customer experiences. Following the launch of OpenAI’s ChatGPT, cloud providers have started utilizing these advancements to unlock new opportunities. Moreover, Tim Potter, a principal at Deloitte Consulting, made the following remarks regarding the relationship between AI and the cloud:
“AI is accelerating the adoption of cloud computing while enabling cloud providers to enhance platform solutions and services. Most AI solutions are either services offered directly by hyperscalers or solutions built on top of a hyperscaler’s cloud infrastructure.”
Another major driver of the cloud industry’s growth is the increasing recognition by large enterprises of its impact on their operations. According to a report by the Cloud Security Alliance, 94% of companies worldwide have already adopted cloud computing solutions this past year. This widespread adoption is projected to have a significant economic impact, with estimates suggesting it could generate around $3 trillion in revenue by 2030.
Although the Magnificent Seven stocks have been in the spotlight since the surge in artificial intelligence excitement, Apple Inc. has recently been making notable advancements in the AI space. Earlier this year, the iPhone-maker unveiled its new artificial intelligence initiative which is set to elevate the cloud to new levels of consumer exposure, with the tech giant moving toward offering on-device AI through a partnership with OpenAI’s ChatGPT platform.
Our Methodology
To compile our list of the 10 worst cloud stocks to buy according to short sellers, we first compiled a list of 20 cloud stocks by sifting through ETFs and online rankings. Then we checked their short interest and selected the 10 with the highest short interest. Finally, we ranked the stocks in ascending order of their short interest. We have also included the hedge fund sentiment for each stock, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Rubrik Inc. (NYSE:RBRK)
Short % of float: 10.46%
Number of Hedge Fund Holders: 28
Rubrik Inc. (NYSE:RBRK) is a cloud data management and security company specializing in data backup, recovery, and protection. Known for its scalability and efficiency, Rubrik effectively meets the demands of modern IT environments.
Despite being heavily shorted, Rubrik Inc. (NYSE:RBRK) recently delivered strong financial results, with Subscription Annual Recurring Revenue reaching $919 million, a 40% year-over-year increase. Cloud ARR also experienced substantial growth, surging 80% year-over-year to $678 million. Rubrik’s Cloud ARR and revenue exceeded expectations by 5%, and its contribution margin outperformed by 500 basis points.
The company’s success was further enhanced by its support for hundreds of customers during the CrowdStrike outage, which contributed to increased pipeline growth. In addition, Rubrik’s net retention rate exceeds 120%, demonstrating that customers are consistently increasing their spending with the company.
On September 10, Guggenheim reiterated a Buy rating on RBRK with a price target of $48. The firm highlighted Rubrik’s impressive growth, noting it as the fastest-growing company within their enterprise software coverage. Guggenheim emphasized that Rubrik’s sales and marketing expenses are well-aligned with new ARR and recommended continued investment to capture the vast market opportunity. The firm also believes Rubrik Inc. (NYSE:RBRK) is on track to achieve free cash flow margins exceeding 35%, comparable to typical software companies at scale.
As of Q2 2024, 28 hedge funds held positions in Rubrik Inc. (NYSE:RBRK), with a combined stake valued at $165.35 million.
Overall RBRK ranks 1st on our list of the worst cloud stocks to buy according to short sellers. While we recognize the potential of RBRK as an investment, we believe certain deeply undervalued AI stocks offer greater prospects for higher returns in a shorter period. If you’re seeking an AI stock with even more promise than RBRK and trading at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.