Confluent Co-Founder and CEO Jay Crapps appears at the company’s sales kickoff on February 8, 2022 in Las Vegas.
Investors looking to get into cloud stocks that have been beaten at basement prices may have missed their chance.
Scanning the cloud software market, which started the year, many stocks have jumped 50% from their lows. The WisdomTree Cloud Computing Fund, a sector-wide basket, is up 26% over the past three months, while the S&P 500 is down less than 9% from that stretch. Cloud Index still underperformed the broader market for the year.
Macro data remains unfavorable for cloud companies, which was exacerbated during the pandemic when interest rates were low and investors were paying large premiums for growth. Now, with the Fed in the middle of a growth cycle and inflation hitting 40-year highs, profits are at a premium as are dividends and products that consumers need in good times and bad.
However, even though Cloud stocks were selling off at a dizzying pace in the first half of 2022, the companies behind those stock prices, for the most part, continued to coexist, proving that their products and services were worth the money. Demand was still strong.
Perhaps the market has corrected, the companies are in good shape and when the confidence in the market returns, these stocks will again outperform. That’s what some investors have been making over the past few months, as they try to capture what they see as easy money.
“Some of this stuff is coming back a little bit,” said Elliot Robinson, a partner at Bessemer Venture Partners and a co-founder of the firm’s growth-investing practice. “We haven’t seen the fundamentals of that basket of businesses really fall off a cliff.”
For example, consider GitLab, whose tools help software developers manage source code. The company’s stock price fell 75% between November and April. The story changed in June.
People celebrate Gitlab IPO on NASDAQ on October 14, 2021.
Despite missing analyst estimates, GitLab posted 75% revenue growth from the previous year. Goldman Sachs upgraded the stock to buy at par with the hold.
“In the near term, GTLB is likely to see a more stable demand background (relative to discretionary and complex IT solutions) as it provides major cost savings and operational efficiencies,” analysts at Goldman Sachs wrote in a report at the time.
Shares of GitLab have more than doubled in the past three months, the fastest gain among WisdomTree Fund shares. Data-processing software developer Confluent has seen the second biggest gain since mid-May, up 81%. On August 3, Confluent reported a 58% increase in revenue For the second quarter and for the year forecast growth of at least 46%.
Confluent’s technology “sits into the operational stack powering applications that directly deliver critical business operations and real-time customer experiences,” CEO Jay Craps told analysts on the company’s earnings call. “Given this importance, it cannot be closed without complete disruption of business operations.”
Large clouds in the last three months
Following Confluent’s report, Atlassian posted a 36% increase, topping estimates and boosting the collaboration software company’s stock, which is now up 67% in three months.
The good news continued this week as well. On Thursday, restaurant-software maker Toast exceeded estimates for the quarter, with revenue climbing 58%, and the company raised its guidance for 2022. This pushed the stock up more than 8% on Friday and up to 55% since May 12.
The cloud sector is getting an added boost from economic data that appears less alarming than it was a month ago. On Wednesday, the US Bureau of Labor Statistics said the prices consumers pay for goods and services rose more slowly in July than in June. Stocks rallied on optimism that the Fed might slow its rate hikes.
But cloud climbing hasn’t been universal. In particular, companies with deeper exposure to the consumer haven’t done well either.
Shopify is up less than 30% over the past three months and is down about 77% from its highs. The company’s software is used by online retailers to help manage payments, inventory, and logistics. In late July, Shopify missed estimates and warned that inflation and interest rates would weigh on the business in the second half of the year.
“We now expect 2022 to be different, as a transition year in which ecommerce has largely reset to the pre-Covid trend line and is now under persistent high inflationary pressures,” the company said in a statement. Statement on its financial performance.
Jamin Ball, an investor in Altimeter Capital, wrote in his weekly cloud newsletter Aggressive buyers in software stocks may be ahead of reality on Friday. He expects the US to enter a recession and sees inflation staying high and interest rates rising.
“Based on the data we have today, I think the market is becoming too optimistic,” Ball wrote. “I don’t think we’re in recession right now, But I think someone is coming, maybe in 2023.”
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