Cloud computing: Are stock prices heading towards zero or a buying opportunity?

Cloud computing, data center, server rack, neural network communication, technology

Just_Super/E+ via Getty Images

Written by Christopher Janati

The decline in many stocks focused on cloud computing software has been unbelievable. In one month, April 11 through May 11, BVP Nasdaq Emerging Cloud Index (imcloud) – a group of cloud-oriented companies – has lost nearly 30% of its value.

In Figure 1 we see:

  • The withdrawal of EMCLOUD from its peak in November 2021, when the US Federal Reserve began discussing removing liquidity from the market in a serious way, was more than 50%.
  • From November 9, 2021 to May 11, 2022, which is the “maximum rollback” period so far, we’ve seen a drop of 58.6% over 126 days.
  • On May 11, EMCLOUD’s closing level fell below the closing levels first observed in July 2019.

Figure 1: The decline in cloud computing prices has been intense

Cloud computing share price decline

Knowing this, the basic question returns to the following, which we can simplify to two conclusions:

  1. Cloud computing as a delivery mechanism through which customers subscribe to software is a wrong business model, and customers will vote with their wallets and go for something different.
  2. Customers are at least as excited, if not more excited, about cloud computing as a delivery mechanism through which they can sign up for programs.

The company’s results support result No. 2 over result No. 1

While we can never see the future with certainty, the evidence we can interpret today tends to indicate that outcome #2 has a higher probability of becoming true.

The big players are still growing – fast.

One of the risks we’re watching in cloud computing has to do with the biggest players shifting from drivers of growth to something more like “utilities” – the concept is that everyone capable of embracing cloud has done so, so future growth is stabilizing.

  • Amazon Web Services (AWS) (AMZN) indicated revenue growth of 37%, $18.4 billion.
  • Microsoft (MSFT) indicated that the portion of its cloud business most directly comparable to AWS grew revenue 46% year over year. Notably, its market share was only 7% in 2016, so reaching 20% ​​in such a short time was impressive.
  • Google Cloud (The Google) indicated a year-over-year revenue growth of 44% to reach $5.8 billion.

M&A activity is still active

While it’s true that not every cloud-focused company engages in mergers and acquisitions, even in the midst of stock price performance turmoil in 2022, companies are still active.

  • Google Cloud announced its intention to buy Mandiant (MNDT), a cybersecurity company, for $5.4 billion. The rationale is to provide its cloud customers with more robust cybersecurity solutions at a time when this is at the forefront of many customers’ minds.
  • Shopify (a store) announced its intention to buy e-commerce company Deliverr for $2.1 billion.

Cloud computing stocks continue to achieve high growth rates

average division growth

Conclusion: Cloud business model remains strong amid significant decline in equity valuations

Some of us may have thought there was a lot of discussion about Western central banks shifting their policy from too “easy” to too focused on mitigating the risks of hyperinflation, something that must have been priced in the stock markets. The recent behavior of software-guided cloud computing companies may tell us something different – it’s clear that adjustments are still in progress. The bottom line is that these subscription-based companies are still significantly increasing their revenue, even if that growth isn’t close to what would have been seen during the pandemic in 2020. Those with a time horizon of the next few months may have a period of uncertain outcome. Extremely. Those with a time horizon in the 5, 7, or 10 year range — as long as the cloud business model continues to get attention — might see this pull-up as an interesting opportunity.

There are risks involved in investing, including the potential for capital loss. Foreign investment involves currency, political and economic risks. Funds focused on a single country and/or sector and/or funds focused on investing in smaller companies may experience greater price volatility. Investments in emerging markets, currencies, fixed income and alternative investments have additional risks. Please see prospectus for a discussion of risks.

Past performance is not indicative of future results. This material contains the views of the author, which are subject to change, and should not be considered or construed as a recommendation to participate in any particular trading strategy, or as an offer or sale of any investment product and should not be considered to be relied upon as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a point in time and is not intended to be a prediction of future events or a guarantee of future results. This material should not be relied upon as research or investment advice with respect to any safety in particular. The user of this information assumes full risk of any use of the information contained herein. Neither WisdomTree nor its affiliates nor Foreside Fund Services, LLC or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their own tax or legal advisor. Unless expressly stated otherwise, the opinions, interpretations or results expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

MSCI Information may only be used for your internal use, may not be reproduced or republished in any form and may not be used as the basis or component of any financial instruments, products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any type of investment decision and should not be relied upon as such. Historical data and analysis should not be taken as an indication or guarantee of any analysis, forecast or prediction of future performance. MSCI Information is provided on an “as is” basis and the user of this information assumes the entire risk of any use of this information. MSCI, each of its affiliates, and each entity involved in the collection, computation, or creation of any MSCI Information (collectively, the “MSCI Parties”) expressly disclaim all warranties. In connection with this information, in no event shall any MSCI party be liable for any direct, indirect, special, incidental, punitive, or consequential damages (including profits or losses) or any other damages (www.msci.com)

Christopher Janati

Christopher Janati, CFA

Global Head of Research

Christopher Janati started at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January 2014, he was promoted to Associate Director of Research where he was responsible for leading various groups of analysts and strategists within the broader research team at WisdomTree. In February 2018, Christopher was promoted to Head of Research Europe, who will be based out of the WisdomTree office in London and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbet, where he worked for four and a half years as a regional advisor. He received an MBA in Quantitative Finance, Accounting, and Economics from New York University’s Stern School of Business in 2010, and a BA in Economics from Colgate University in 2006. Christopher holds the title of Chartered Financial Analyst.

original post

Editor’s note: The bulleted summary of this article was selected by searching for the alpha editors.