The cloud is the new dot.com frenzy where earnings are immaterial, as old line software companies are moving in and the cloud pioneers are expanding their market share in the hopes of becoming a big fish or being swallowed by one, says Rob DeFrancesco of Tech Stock Prospector.
Gregg Early: I am here with Rob DeFrancesco, editor of Tech Stock Prospector. Rob, I think one of the big topics today that a lot of investors are hearing about-but I'm not quite sure how much we understand it-is the cloud. Could you talk to us a bit about the cloud, what it means, and who's going to benefit out of all this?
Rob DeFrancesco: Sure, the cloud, that term, is fairly new. We've heard of it as described as on-demand software, but basically, instead of buying packaged software or instead of buying a huge software package, enterprises are accessing software via the cloud. They are accessing it from outside of their premises. I think it's a major change going on in the industry right now.
You have your old legacy software companies, Oracle (ORCL), Adobe (ADBE), Autodesk (ADSK), and then the big cloud company these days is Salesforce.com (CRM). Earlier this week, Salesforce kicked off its Extreme Force User conference with 90,000 registered attendees, which shows you how big this is.
It was funny, because then also yesterday Adobe-which is an old school software company-had their earnings report and virtually the entire call was about how they're moving their product to the cloud. They have a thing called Creative Cloud, and they're getting 25% of their revenue now from recurring as opposed to just selling a software package up front.
The good thing with a cloud company is you get a steady stream where people are paying you either yearly or monthly for the service. It provides for these companies where it is like they are looking at forecasting earnings every quarter, and so this gives them a better insight into what their business looks like down the road. So it smoothes things out a little bit.
Gregg Early: It's more reliable than, say, with the software model. If you buy a piece of software, you don't know whether next month you're going to sell the same amount of software. Whereas now with the cloud, you are evening that out so that you have subscriptions. Salesforce.com has been a pioneer in this right? They've been around for a long time.
Rob DeFrancesco: I think CEO Marc Benioff is smart. He's like an evangelist for this software, and watching him talk, he's just so excited about it. Obviously he has an interest in it, and they're doing extremely well.
I think they're past $3 billion in revenue right now, so they're not huge compared to Oracle. I just saw something where some analyst said that he could see them getting up to $10 billion. They have everything in place for the next several years for reaching that level.
Salesforce is the biggest cloud player out there. I think their market cap is around $20 billion, so they're the leader in terms of market cap. But over the past, say, 12 to 24 months, we saw a lot of large, older software companies buying up the cloud.
SAP bought Success Factors, which was a cloud-based software company that does human capital management. They are basically doing on-boarding and recruiting and things like that. Then Oracle bought Taleo, IBM bought Kenexa, SAP also bought Ariba, so these cloud companies that have been around for a little while, are getting bought up, and there's been a whole new crop of recent IPOs that have come on board.
There's a lot of cloud-based companies now that are public out there. A lot of times with these smaller companies, you have to be careful because they come out with these huge valuations because they're showing great revenue growth. And inevitably they stumble, or something happens-they have a bad quarter-and they come down, and that's often an opportunity to get in there.