As the world becomes increasingly digital, people and companies continue to shift to the cloud for greater efficiency, cost, and agility. The pandemic undoubtedly accelerated this change, and global cloud spending is set to reach $1.3 trillion by 2025, growing at a 16% compound annual growth rate. We examine three companies that are likely to be beneficiaries of this trend.
Snowflake: Bull v.s. Bear arguments:
Snowflake (NYSE: SNOW) is a cloud computing-based data warehousing company that went public in 2020 and is the largest software IPO ever.
Snowflake’s platform allows its users to collect, store and consolidate data in a single place to gain actionable business insights. It is operated as a Software-as-a-Service (SaaS) and can be hosted on the three major cloud platforms.
The company reported 5,416 customers in Q3 2022, representing 52% growth year-over-year (YoY). It also has an awe-inspiring net revenue retention rate of 173%, demonstrating the stickiness and value of its products. This positively impacts its revenue which grew by 110% year-over-year (YoY) in Q3, reaching $334.3 million.
However, investors will have to pay up for this quality business. The company is trading at a nosebleed valuation of 100X sales and is still unprofitable, and any slowdown is likely to cause the stock to drop.
Microsoft: Bull v.s. Bear arguments:
Microsoft (NASDAQ: MSFT) is the largest company on the list and is only second to Amazon Web Services in terms of cloud market share.
Despite its size with a market capitalization of roughly $2.3 trillion, the company continues to expand. It announced another earnings beat in Q2 with revenue growth of 20% YoY, reaching $51.7 billion. Azure led the way with 46% growth in the quarter, with cloud revenue accounting for $22.1 billion of the total. Microsoft is also hugely profitable and reported a net income of $18.8 billion.
Beyond its cloud business, the potential in other verticals is equally if not more exciting. Its impending acquisition of Activision Blizzard is one example of this, but investors should be aware that the deal will likely come under regulatory scrutiny, which could derail it.
DigitalOcean: Bull v.s. Bear arguments:
DigitalOcean (NASDAQ: DOCN) is the smallest company on the list and went public in 2021 and is a niche player in the cloud space.
It focuses on solutions for small and midsize businesses (SMB) that larger cloud providers often underserve and aims to provide better support and transparent pricing. This creates what it believes will be a $115 billion total addressable market by 2024 as the number of SMBs and developers grows.
The company’s economics has continued to improve with revenue growth of 37% in Q3 reaching $111 million. Its customer count also reached 598,000, an increase of 7% YoY, while average revenue per user also increased to $61.97 from $48.58 in the same period a year prior. These are encouraging signs for this young company.
Unsurprisingly, DigitalOcean is operating at a loss of $(0.02) per share in Q3, and the larger cloud providers could threaten its growth if they decide to serve the SMBs.
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