Stocks of Cloud computing are off to a declining start. To the new year as a new wave of pandemic grips. Cloud computing or cloud software has remained one of the best bets for investors over the past held. Decade with more businesses relying on the service providers.
But the recent slump which started in November has deepened this week. Cloud stocks as an index are down 29% from their November high. This is partially due to the expected hike in interest rates from Federal Reserve. Other contributing factors include market rotation and the economy reopening from the pandemic.
About Cloud computing
Cloud computing services have been some of the top gainers in technology and played a vital role. In the development of new businesses and services.
Since Bessemer Venture Partners created the BVP Cloud Index of publicly traded companies in August 2013, the basket is up 909%. Almost triple the gains in the Nasdaq and five times better than the performance of the S&P 500.
Pandemic has changed the whole economic picture, as companies, businesses and government agencies quickly transitioned to the cloud. So they could access remote communications, meetings, collaboration, and file-sharing tools. The most notable winners were video chat service Zoom, e-commerce software vendor Shopify and e-signature provider DocuSign. These companies have seen healthy revenue growth in 2020 and stock gains well into the triple digits.
Software as a service, or SaaS, stocks have since gone out of fashion. While legacy computer and printer maker HP Inc. is touching new highs and the Dow Jones Industrial Average is down only slightly this year, the work-from-home trend is suddenly bearish.
Zoom and DocuSign are each more than 50% off their 52-week highs and Shopify is down 34%. Asana was the best-performing U.S. tech stock last year until mid-November. The provider of project management software has since lost 58% of its value.
Zoom stock declining trend throughout a years’ time.
Higher interest rates can spell challenges for much of the market, but they represent a notable roadblock for cloud stocks, especially for companies that aren’t making money yet. Investors value companies based on the present value of future cash flow, and higher rates will reduce the amount of that expected cash flow.
Twilio which sells back-end software for communications has its stock price fallen to 46% from its high early last year even though earnings and revenue exceeded estimates every quarter. Zoom is also seeing a decline after trading at 14 times sales on a trailing basis, down from a peak of 189, according to FactSet. DocuSign’s trading sits at 15, having fallen from a high of 50.
While not every cloud vendor has the cash cushion of Twilio, Zoom or DocuSign, many companies in the space sport high software margins and are boosted by subscription businesses that continue to show strong retention.
What do you think about the recent decline in the market this past week? Let us know what you think about this subject in the comments section below.