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By Rick Summer, CFA, CPA | 07-28-2015 03:00 PM

4 Quality Stocks in the Cloud

Moaty Salesforce and Workday are compelling pure plays, while Oracle and Autodesk are successfully transitioning to cloud-application models, says Morningstar's Rick Summer.

Rick Summer: The technology team recently looked at the cloud-applications sector to get a better handle on the economics of the cloud-applications companies, and we came away with a couple of important overriding conclusions.

First of all, when we look at many of these pure-play companies, like Salesforce (CRM) or Workday (WDAY), we found not only do they have moaty characteristics, but that actually translates into massive operating leverage. So, these companies that aren't yet generating substantial operating profits should see massive leverage in sales and marketing and research and development, although we shouldn't see that for more than several years.

From a legacy perspective, companies like Oracle (ORCL) and Autodesk (ADSK) are actually migrating their traditional business models toward cloud-applications models. Importantly, we actually believe that these companies will maintain or come very close to maintaining their profitability relative to where they were traditionally. That's very important because both of these companies are trading at a modest discount to their fair value estimates today. We think they look reasonably attractive as a result, and sometimes the current metrics are hiding the fact that these companies are being successful in this transition.

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