Cloud stocks have become a haven in technology. 4 shares to buy.
As the world emerges from the pandemic, tech companies have been put in a tough spot. They are under pressure to maintain pandemic-era surges, and many of them have struggled to rise to the challenge, including
Focus on video communications,
Chegg. But there is one pandemic trend that cannot be reversed: cloud computing is here to stay. In fact, the cloud trend is gaining momentum.
Almost every company in Silicon Valley talks about the power and sustainability of “digital transformation,” the shift of more companies and business processes to the digital realm. It’s an overused buzzword. I can barely say this without grimacing, but the digital transformation is real, and you could see the evidence of it throughout last earnings season.
The first clues appeared about a month ago, with the quarterly results of
Microsoft (symbol: MSFT),
Amazon.co.uk (AMZN), and
Alphabet (GOOGL). Microsoft Azure grew 46% in the last quarter, Google Cloud grew 45%, and market leader Amazon Web Services grew 40%. The big ones are getting bigger, at an accelerated rate.
The strength of the cloud has also been reflected in strong results from key infrastructure providers such as
Cisco Systems (CSCO) and
Arista Networks (ANET), and crucial chip suppliers for these companies, such as
Nvidia (NVDA) and
Earnings news last week brought a fresh wave of data points from enterprise technology companies.
HP Company (HPE), which makes servers, storage and networking hardware, reported revenue growth of 2% for the quarter. It’s not a big upset on its own, but it beat Wall Street estimates and order growth topped 20% for the third consecutive quarter, with orders growing 35% in its networking hardware unit. ‘Aruba.
Pure storage (PSTG), which makes flash memory for enterprise storage, crushed expectations for the January quarter. “Any business considering upgrading their systems to invest in data, that is, all businesses, should consider us as one of their suppliers,” says Pure CEO Charles Giancarlo. Pure posted 41% growth over the quarter. This is the company’s best growth in four years.
Broadcom (AVGO), a key chip supplier for cloud players, said its April quarter results would accelerate from 16% growth in the January quarter.
The trend is more evident on the software side.
Selling power (CRM), the largest and most experienced player in the software-as-a-service industry, has expanded its cloud-based offerings from its core customer relationship management software into a host of new areas, partly through acquisitions, including $28 billion last year in purchases of messaging service Slack. At constant currencies, Salesforce saw revenue growth accelerate for four consecutive quarters, to 27% last quarter from 19% a year ago.
“Digital transformation is an enduring secular trend,” Salesforce co-CEO Bret Taylor told me last week.
The same pattern plays out
Working day (WDAY), which sells human resources and financial management software to large corporations. Workday reported 22% revenue growth in its January quarter; sales have grown for three consecutive quarters.
Box (BOX), once a basic cloud storage provider, now sells a suite of tools to help businesses manage, share and protect their documents. The company also released better-than-expected January quarter results. CEO Aaron Levie says Box is benefiting from the shift to hybrid working, an increased focus on cybersecurity and, all together now! – “digital transformation”. Box reported 17% revenue growth in the quarter, accelerating for the fourth consecutive quarter. A year ago, sales had only increased by 8%.
Finally, there is
Snowflake (SNOW), the fastest growing major cloud stock. The company sells data analysis tools that are based on the three public clouds. Snowflake posted 102% growth in the January quarter, which, while extraordinary, actually left investors wanting more. The stock fell 15% on the report.
CEO Frank Slootman told me in a post-earnings interview that the company recently made its software cheaper to use. Snowflake, which once sold compute time by the hour, now sells it by the second, he says. The change affected the company’s January 2023 revenue outlook by nearly $100 million, but Slootman believes the move will drive customers to use more data over time.
Morgan Stanley analyst Keith Weiss writes that Snowflake is banking on the Jevons paradox, a theory by 19th-century economist William Jevons. He argues that as the use of resources becomes more efficient, consumption tends to increase.
Slotman is a believer. “It’s not philanthropy,” he says. “When you make something cheaper, people buy more of it.”
Snowflake shares, which went public in September 2020 at $120 and immediately doubled, have fallen around 45% from their November high above $400. There is an ongoing debate on Wall Street about how to value the company. At current levels, Snowflake is trading for a high of 34 times estimated January 2023 sales for the fiscal year.
But Snowflake forecasts 65% to 67% growth for the current year, and I suspect it could be much higher. Last year, Snowflake’s initial forecast was for 80% growth; sales eventually increased by 106%.
Although Snowflake is not a value stock, the story is compelling and Slootman is one of Silicon Valley’s most respected CEOs. If you believe the larger cloud story, I wouldn’t bet against it.
Write to Eric J. Savitz at [email protected]