By Christopher Gannatti, CFA
Global Head of Research
The drop in many cloud software-focused stocks has been, in a word, incredible. In the space of about a month, from April 11 to May 11, the BVP Nasdaq Emerging Cloud Index (EMCLOUD), a group of cloud-oriented companies, lost about 30% of its value.
In figure 1, we see:
- EMCLOUD’s decline since peaking in November 2021, when the US Federal Reserve began to seriously discuss removing market liquidity, has been over 50%.
- From November 9, 2021 to May 11, 2022, the “maximum drawdown” period to date, we experienced a 58.6% decline over 126 days.
- On May 11, EMCLOUD’s closing level fell below closing levels first seen in July 2019.
Figure 1: The drop in cloud computing stock prices has been INTENSE
Knowing this, the main question comes down to the following, which we can simplify into two results:
- Cloud computing as a delivery mechanism where customers subscribe to software is the wrong business model, and customers will vote with their wallet and go for something different.
- Customers are at least as excited, if not more so, about cloud computing as a delivery mechanism by which they can subscribe to software.
Company results support result 2 over result 1
Although we will never be able to look to the future with certainty, the evidence we can interpret today would tend to indicate that outcome #2 has a higher probability of occurring.
The big players continue to grow – FAST.
One of the risks we’re watching in cloud computing is that the biggest players in the growth engines are moving to something more like “utilities” – the concept being that everyone who is capable of adopting cloud computing have done so, so that future growth stabilizes.
- Amazon Web Services (AWS) reported revenue growth of 37%, or $18.4 billion.
- Microsoft reported that the part of its cloud business most directly comparable to AWS increased revenue by 46% year over year. It should be noted that it only had a 7% market share in 2016, so reaching 20% in such a short time was impressive.
- Google Cloud reported year-over-year revenue growth of 44% to $5.8 billion.
M&A activity is still active
While it’s true that not all cloud-focused companies are involved in mergers and acquisitions, even amid the stock price turmoil of 2022, companies are still active.
- Google Cloud has announced its intention to buy Mandiant, a cybersecurity company, for $5.4 billion. The goal 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 has announced plans to buy e-commerce fulfillment specialist Deliverr for $2.1 billion.
Cloud Computing Stocks Still Offer High Growth Rates
Bottom Line: The Cloud Business Model Is Still Robust Amid Substantially Falling Equity Valuations
Some of us might have thought that there has been so much talk of western central bank policy going from extremely ‘easy’ to extremely focused on mitigating the risk of runaway inflation that it must have be integrated into stock markets. The recent behavior of software-focused cloud companies would tell us something different: Adjustments are clearly still underway. Our result is this: These subscription-focused companies are still growing their revenue significantly, even if this growth is far from what would have been seen during the pandemic period in 2020. Those with a time horizon of the next few months may have a outcome extremely uncertain. Those with a time horizon on the order of 5, 7 or 10 years – as long as the cloud business model continues to find favor – may see this downdraft as an attractive opportunity.
Originally published on June 3, 2022 by WisdomTree
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