Post-Covid, cloud software proves opponents wrong (again)
Despite historic growth levels last year, many leading cloud stocks reported strong growth in recent first quarter earnings reports. We’ve heard the story before value stocks are a safer choice, but cloud category income growth and high margins refuse to stop in order to let non-tech investors have their moment.
Below, we discuss the state of the post-covid cloud and what we’ve seen in the latest earnings reports that have led us to believe the cloud is stronger than ever. We also take a look at the stats on where we are in the cloud adoption cycle.
Source: I / O Fund
Cloud stocks in an open economy
Last year, policymakers were under pressure to stay afloat in an environment of sudden recession. The uncertainty of the pandemic as well as the effects of the foreclosure of the economy have led to budget cuts with little preparation.
As a result, we have seen CFOs cutting overheads at an aggressive rate. A 2020 Gartner survey found that 62% of CFOs surveyed planned spending cuts in their budgets. We see below that despite budget cuts in IT, cloud software has remained resilient over the past year – a prediction I made in 2019 when I said:
“My prediction is that this could be one of the last cycles where technology is seen as less secure than value stocks. As the market will find out (the hard way), cloud software is actually very secure. isolated from trade wars and overseas manufacturing problems. It cuts costs for businesses, which is ideal during a recession. Finally, cloud software is at the start of a rapid growth cycle relative to its technology counterparts.
In 2020, IT spending has been cut, but cloud software has grown to historic levels. In fact, cloud software and infrastructure migrations help reduce costs while increasing productivity. However, in times of expansion, increased productivity and scalability is also welcome.
This acceleration from last year has been widely seen as a one-time event rather than a permanent change in the way businesses are leveraging cloud products. The narrative around cloud stocks through 2021 was that valuations were unrealistically stretched due to unusual growth in 2020. We have even seen many beneficiaries of the cloud migration being referred to as “coronavirus stocks”. and would have done bad investments after the end of confinements.
Meanwhile, Zoom went on to bring back his 5e quarter of triple-digit year-over-year growth, with an upside surprise of 8.7% for their reported revenue. Zoom also confirmed an expectation for 42% revenue growth in the coming year, which has led analysts to raise their consensus by 4.7% and 4.8% respectively for this year and next year.
Shopify was another coronavirus stock that is expected to continue declining from February’s high as more people buy offline. Not only have they benefited from the cloud migration, but they have also benefited from the acceleration of e-commerce, which has adapted well to a shelter-in-place environment.
With the US economy almost fully open, Shopify achieved triple-digit year-on-year revenue growth, the highest in its history. Shopify’s reported revenue was just over 14% upside surprise based on analyst expectations. It’s almost 3 times the average revenue surprise for the tech industry at 5.6%, according to FactSet for the first quarter.
In fact, if we take a look at the fastest growing companies from last year, we see many of the same names in the Top 10 for this year’s expected growth now that the first quarter has arrived. This is the exact opposite of what we were told would happen when cloud software faced “harder covid coms”.
Cloud spending on the go
Gartner’s most recent survey indicates that there is still quite a bit of growth to come despite the more difficult compositions that leaders in cloud software will face in 2021.
According to Gartner, around the world public cloud spending will increase by 18% in 2021 to reach $ 304.9 billion. Relative to overall IT spending, the cloud still has a long way to go and is expected to account for 14.2% of total global business IT spending in 2024, up from 9.1% in 2020.
Additionally, data shows that 70% of organizations using cloud services plan to increase their spend, stating “the proportion of IT spending allocated to the cloud will further accelerate in the aftermath of the COVID-19 crisis.
The analyst firm says mobility, remote working and hybrid workforce are trends that will lead to further market growth. This is confirmed by recent earnings reports from major post-COVID cloud computing companies.
The analyst firm also indicates that the hyperscale cloud market will “”return to hypergrowth “by 35% to $ 120 billion in 2021. This represents an increase from the initial forecast that the IaaS cloud would increase by 28%. The analyst firm also predicts that Alibaba will take third place instead of Google Cloud.
Forrester recent poll showed similar results with 47% of North American managers anticipating a higher rate of permanent full-time remote employees and 53% of employees wanting to work from home after the pandemic.
In 2021, at the height of the SPAC bubble, we specifically stated that Zoom and Shopify would perform well by 2021 (ref. minute 53:00 on YouTube video). We weren’t fazed by the cloud being labeled “coronavirus stocks” as there is no evidence of it; the category has always been very successful and will be for the foreseeable future.
It’s easy to get creative with new names hitting the market, especially with IPOs, the small cap rally we saw earlier this year, and the SPAC bubble. Still, it can often pay off to stick with what has been proven to work. Winners tend to keep winning and the first quarter of 2021 was no exception.