Rising global digitization due to the pandemic has been a catalyst for companies in the cloud computing and data analytics space, opines entrepreneur and investor Shailesh Dash
The world has experienced one of its most significant crises in recent times, courtesy of Covid-19. Notwithstanding the health impact, the pandemic has provoked a massive disruption to global economic activity, supply chains and businesses.
Resulting efforts to ensure survival and revive business activity have largely accelerated the digitization of the global economy, even as governments, corporate and businesses increasingly turn to technological advancements for sustainable growth.
Consequently, big data, IoT, cloud computing, and other technologies are witnessing growing prominence as the end-to-end connections that they provide across data points via universal networks are paving the way for infinite wealth pools of data to be shared seamlessly across borders.
Cloud computing and data analytics technology have driven innovation across industry verticals, from e-commerce and finance to education and healthcare, enabling companies to adapt their business models to the new normal wherein travel restrictions limit physical connectivity.
Rising global digitization has also been a catalyst for companies in the cloud computing and data analytics space, as fresh avenues provide new growth opportunities.
For instance, several healthcare providers and policymakers are turning to big data analytics models to achieve enhanced care delivery, resource allocation and preventive health measures, especially in light of the pandemic. Big data analytics tools are also being used to forecast potential limitations in hospital capacity and resources.
The retail sector is witnessing a similar trend, particularly for companies that have effectively shifted to an online model, and have leveraged big data analytics to better understand and predict consumer behavior.
Meanwhile, financial firms are increasingly using AI-powered tools to enhance digital transactional models such as advisory robots and improve the overall banking experience. Constant evolution in these tools is leading to data-driven decisions becoming a mainstream solution, setting new standards in technological prowess.
Amid this landscape, tech giants such as Amazon, Microsoft, and Alphabet are growing at a commendable pace. Despite their size, these companies have demonstrated potential for further growth due to their aptitude to endure and emerge stronger from economic storms.
For instance, Amazon’s stock is up almost 83 per cent since the start of 2020 as its cloud computing company, Amazon Web Services (AWS), which remains its most profitable segment, witnessed a 29 per cent surge in Q2 2020 sales to reach $10.8bn, significantly overshadowing its e-commerce segment.
Meanwhile, Microsoft’s large expo- sure to key cloud businesses themed on digital engagement, remote work and workflow planning, has helped it to address a sizable market that is expected to grow to $460bn by 2025. Microsoft is expected to achieve double-digit annual revenue growth in this period.
Notably, the current global cloud infrastructure services market is far from tapped out, and is expected to witness massive growth in coming years, with projections estimating its growth at 18 per cent CAGR to reach roughly $167bn by 2024, from $73bn in 2019.
Global equity markets are echoing similar optimistic sentiments, with unprecedented price surges witnessed in technology stocks since the start of 2020, despite the steep global recession due to the pandemic.
Software-as-a-service (SaaS) stocks, which were witnessing a rallying much before the pandemic, have seen an unprecedented surge since March while cloud computing stocks have also been major gainers of this rally.
Despite the sharp surge in technology stocks, some of them are still perceived to be undervalued and present attractive prospects in the current market. Hence, the correction in tech stocks in recent weeks should offer an opportunity to accumulate them for a long-term portfolio, given their robust fundamentals, business resilience and futuristic growth prospects.
For instance, Alteryx, a data science and analytics firm, displayed consistent performance in the last three years, with its stock climbing roughly 471 per cent during this period. However, slowing growth in Q2 drove the stock lower despite the company beating estimates for the quarter, suggesting that the recent sell-off could prove to be a sharp bargain as the company exploits the growing global opportunity within analytics.
Similarly, Splunk, a major player in the global data analytics space, is also growing at a commendable pace, with its stock up 45 per cent YTD. The company enables firms to analyse and interact with machine-generated big data, and is now evolving to a subscription model that would drive recurring cash flows instead of single payments. As mixed earnings’ results have recently dragged its stock price, this provides an opportunity to capitalize on long-terms gains.
Ad-tech platform The Trade Desk (TTD) is another firm that boasts of a robust long-term performance, with a compound annual EPS growth of 35 per cent for the last three years, while its share price rallied by a whopping 615 per cent in this time frame. TTD operates in the digital advertising market, and its cloud-based platform helps advertising buyers optimize data-driven digital advertising campaigns.
While growth slowed this year, a positive outlook for H2 2020 amid strong prospects for the data-driven digital market, is likely to enable continued growth for the company. Coupa Software, a business software developer, is also emerging as a silent winner. Having risen 133 per cent in 2019, its shares have rallied another 123 per cent in 2020, due to lucrative prospects for its cloud-based procurement, invoicing, payment and financial analysis solutions, especially in the current pandemic-hit economy.
Lastly, Australian software developer Atlassian Corporation PLC (TEAM) is also demonstrating potential for growth. The rising need for collaborative teams in the current landscape is boosting demand for its software development, project management, content management, and collaboration software tools. New clients and selective higher pricing led its revenues to rise 29 per cent year-on-year for the fiscal fourth quarter, surpassing estimates. Analysts further estimate revenue at $1.92bn and EPS to grow to 1.14 for the current year.
The continued interest in cloud computing service businesses is most evident in the recent listing of Snowflake, which witnessed the largest IPO ever for a US software company, raising about $3.4bn in proceeds, and achieving a market capitalization of over $33bn, more than 2.5x of its $12.4bn pre-listing valuation. The offering was 2020’s biggest, and has attracted prominent investors, due to its rapidly-growing customer base and revenues, which grew 121 per cent y-o-y in Q2 2020, over strong business prospects.
Although Snowflake recorded negative profits, the massive interest in the company is proof of the surging demand for technology- driven cloud and data analytics companies. Moreover, companies operating via SaaS models for income generation will be well poised to benefit in the long term. The rising trends around collaboration and connectivity in an increasingly remote work environment will also accelerate the pace of growth in the technology space, particularly for companies that continue to innovate and use strong balance sheets to optimize costs, expand their presence and user base, and grow sustainably in the new normal
Disclaimer: This column is purely for academic and educational purposes. Nothing mentioned here should be taken as solicitation to trade or a recommendation of a specific trade. The author has direct exposure in recommended stocks.
Published on September 30, 2020