2 distinct #Clouds are
visible on the Tech Horizon these days.
… Read more…
1. One is our fav ‘As a Service’ #Cloud of a various types offered
by the (aging?) #CloudComputing leaders, which is used by regular business and
consumers.
2. The other #Cloud is used
only by Investors and refers to how they compute returns from Cloud Companies –
let us calls it #ReturnsCompute Cloud. Stay focused
on it.
The Investor dream
How do Investors generate returns? Some of our #Cloud leaders, despite being in
their teens, neither make profit nor declare dividends. So where does that
leave Investors? Enter the #ReturnsCompute
Cloud, used by Investors.
#ReturnsCompute Cloud,
is a dream that most Investors live with.
The dream covers topics like Stock Price and its movement. Returns are computed
by estimating the cumulative stockholder return on common stock over a period
of time. By extension, one can compare this return with the cumulative return
of the S&P 500 Index on an investment of $100 over the same time period,
along with re-investment of profits / dividends. However, profits & dividends are rare in
our Cloud World.
Am I generating
returns based on Stock price growth?
That is the primary question, and some may go beyond. If one
goes beyond, there might be a couple of follow up Questions. How long
is long enough for Investors to stay content with and live off Stock Price
growth? When would Investors start demanding
Real Profits from the Cloud Companies?
To choose Growth over
Profit is an old practice, as old as business itself. Long term Investors however, used to have a timeframe or a threshold size in
mind – a point in time beyond which, not making profit wasn’t considered cool. So, how are the investors in today’s #Cloud
companies different? While Investors don’t
seek to develop Profit making habits, some of the Cloud companies could be
spending more money on sales and marketing chasing growth than on innovation and
product development. Which could hurt them in the long run.
Why Profits? Why
hurry? 5 to 10 years is too short. Give them more time.
There is a lot of content on the web arguing both ‘for and
against’ demanding profits and dividends from the #Cloud Companies.
Most analysts produce content that asks one to “Let the Situation
Be.” They tell us to visualize how today’s
Cloud Companies are building products for future, and creating value. They confirm that we are better off making
money from the stock price movement of today’s Cloud Companies. Mind you there
could be companies that may even report faster growth in stock price than in revenue. These analysts encourage us to forget the
bubbles of the past. It feels good to imagine, this trend is for real.
Here is a list of some
of my fav companies. I admire them for being
trend setters and creating new markets.
|
WORKDAY
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
Revenue ($ Billion)
|
0.1344
|
0.274
|
0.469
|
0.788
|
1.162
|
|
Net Loss ($ Billion)
|
-0.079
|
-0.119
|
-0.173
|
-0.246
|
-0.289
|
Workday doesn’t double revenues every year anymore. It also doesn’t anymore threaten to dethrone Oracle
and SAP from HCM market space. But it is
still reporting impressive revenue growth rates of 35%+ and might continue to
do so into 2020. Without ever thinking
of dividend, $100 invested in Class A common stock of Workday in Y2012 could be
worth $129.4 in 2016.
|
Salesforce
|
2012
|
2013
|
2014
|
2015
|
2016
|
|
Revenue ($ Billion)
|
2.266
|
3.050
|
4.071
|
5.373
|
6.667
|
|
Net Loss ($ Billion)
|
-0.0115
|
-0.270
|
-0.232
|
-0.262
|
-0.047
|
Salesforce is slowing down with its core Sales Cloud
business, but still manages above 30% growth rates with other offerings. It would probably set history as the first
SaaS company hitting $ 10 Billion run rate before 2020. Without ever thinking
of dividend, $100 invested in Salesforce stock in Y2011 could be worth $211 in
2016.
|
NetSuite
|
2012
|
2013
|
2014
|
2015
|
|
Revenue ($ Billion)
|
0.309
|
0.415
|
0.556
|
0.741
|
|
Net Loss ($ Billion)
|
-0.035
|
-0.060
|
-0.100
|
-0.124
|
NetSuite is maintaining 30%+ growth rates and looks poised
to repeat the performance for a few more years. It is working hard on markets
outside US and positioning itself as ‘the most optimal Cloud Enterprise App alternative’
to Oracle and SAP in the world of medium sized businesses. Without ever thinking of dividend, $100
invested in Netsuite stock in Y2010 could be worth $338 in 2015.
As an admirer, I also worry about their profit making
habits. The profit numbers graphic doesn't look pretty.
Time to learn from the past bubbles?
I am worried that my fav aging,
non-profit making and market share chasing companies might be hit by more young
and nimble competition. Market forces
after all. There are other Investors buying
into the virtues of #ReturnsCompute Cloud
and pumping money building up other market share chasing companies. And, when growth levels dip into teens
for the established players, the #ReturnsCompute Cloud might burst. Time to
learn from the past bubbles?
Note: I am not
discussing Cloud business of or investments by biggies like Microsoft, Oracle,
SAP, Amazon and Google. They don’t publish separate results for Cloud. I would prefer to assume they do make enough Profits
elsewhere to invest and chase market share for Cloud products.
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