You didn’t have to be Warren Buffett to predict that cloud service providers—which are essential to remote working—would do well during the pandemic, even as sectors like airlines and hospitality took a beating. But that doesn’t mean every cloud company performed the same.
In an incisive essay, Jamin Ball of Redfin Ventures examined how 54 publicly traded cloud companies, which reported earnings between late April and early June, performed over the first quarter.
All but three of the 54 firms beat analyst expectations, and many of them did so by a wide margin. Once again, this is hardly surprising given how many people and companies had to embrace remote work in 2020—a situation that favors firms that can provide cloud-based tools to communicate, shop, invoice and much more.
Ball, however, used a series of financial metrics to identify the best of the bunch. The metrics include a few commonplace ones, like share price appreciation, but more nuanced ones too. These included net revenue retention—a number that looks at how much revenue increased for a given cohort of customers from one to the next—as well a company’s cost of customer acquistion.
This analysis produced eight standouts among the 54 companies Ball analyzed, each of which performed well across his various metrics. Some of the companies are well known like Zoom, which is everywhere these days, and the e-commerce giant Shopify.
The others are may be less known to many consumers and investors. They include information monitoring service DataDog and Bill.com, which offers tools to create and manage digital invoices.
Two cybersecurity companies, Crowdstrike and ZScaler are on the list, and so is San Franisco-based Twilio, which helps companies automate text message services. Rounding out Ball’s best-in-cloud ranking is Fastly, which helps companies with content delivery and online streaming.
All of these companies are relative recent arrivals to the public markets, and investors view them as having high growth players compared to longtime cloud incumbents like Microsoft and Adobe. Unsurprisingly, their share prices already reflect this bullish sentiment.
One passage in Ball’s essay, highlighted by several readers, explains how the combination of high-growth potential and predicable revenue has made these cloud stocks so appealing to many investors.
“Companies like Twilio, with high net retention of 143% … can afford to add 0 new customers over the next year and still grow 43% annually. This is astounding, and something no other industry can claim. The lifetime value of each customer …. is often multiples greater than the cost to acquire them. The combo of predictable revenue streams, high (and in some cases accelerating) revenue growth, and attractive unit economics have made SaaS an incredibly attractive market throughout these turbulent times,” Ball writes.
Sounds like a sector even Warren Buffet could love.
