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