Best Bets in the Cloud
05/23/2016 12:00 am EST
Rob Defrancesco has followed the fast-growing cloud sector since its initial development; here, the editor of Tech Stock Prospector explains the next phase of growth for the sector and the best positioned stocks for long-term gains.
Steve Halpern: Our special guest today is technology industry expert Rob DeFrancesco, editor of Tech-Stock Prospector. How are you doing today, Rob?
Rob Defrancesco: Doing well thanks. Great to be here again, Steve.
Steve Halpern: Now today we’re going to talk about cloud technology and before we look at the future of the technology, could you walk us through the various phases of this market has already gone through on and then can you touch on your expectations for the next phase of growth in the cloud arena?
Rob Defrancesco: Sure. Well, the cloud is really changing the way that companies deploy and use technology these days so we’re moving away from on premise software and to an on-demand model where it’s a pay-as-you-go and that has really benefited small and mid-sized companies.
To begin with, because there’s lower upfront costs and you have the flexibility of the on-demand environment and it’s just easier to use. So what’s happening is we’re seeing a shift of spending over to the cloud from spending that would have gone into companies buying their own hardware and software.
So in my latest issue of Tech-Stock Prospector we talk about how there was a first phase of the cloud with smaller companies taking advantage of the cost savings and the cloud.
In the next phase we’ll move to larger companies getting more of their workload into the cloud and so that it’s going to be a long road because with these large companies it just takes a lot more effort to get all of their departments and international units.
So what we’re seeing now is kind of a hybrid cloud environment where we have large companies using a private cloud with their own networks and then they use the public cloud as needed.
You’ll see an expansion in the public cloud, but there have been some estimates that public cloud IT spending is growing six times the rate of overall IT spending so it’s definitely a big growth market and there’s plenty of opportunity ahead.
Steve Halpern: Now some of the leaders in this industry are well known such as Amazon (AMZN) and Alphabet/Google (GOOGL). Could you share your thoughts on these two leading players and what role they take in the industry?
Rob Defrancesco: Yes, well, Amazon has an Amazon web services AWS Unit, which is the leading cloud platform for compute storage, data base, analytics; it’s sort of the go-to. They have about a 31% share of the market.
On their current revenue run rate, they’re at about $10 billion annual so you could say that this is a business that could be valued at anywhere from $70 to $100 billion.
If it were standalone and I guess, there’s always a chance that Amazon may spin out this unit. So it’s fast growing. Their revenue growth is over 60%.
And then Alphabet, which is the parent company of Google now. They have a Google cloud platform, which they’re competing for the same type of business so they are a much smaller player.
Steve Halpern: Now among some more narrow plays in the field if you also like ServiceNow (NOW), NetSuite (N) and Salesforce (CRM). Could you walk us through these companies and what you find attractive with them?
Rob Defrancesco: Sure, well, Salesforce is kind of the cloud software company and they’re going to do revenue of over $8 billion in the current fiscal year and they started out with basically customer relationship management (CRM) software, but that’s now about 40% of the business.
They have expanded more into the service cloud so like contact call, contact centers and they have a marketing, a marketing with automation cloud now so they’re like the old school cloud company, but they’re still putting up solid growth and I think they have a lot of potential still ahead of them.
ServiceNow is more of an upstart in the cloud, but they’re a fast growing company; 30% revenue growth. Their goal is to hit $4 billion in revenue by 2020 and they just had an analysist day where they reiterated that target and they’re on their way.
Another thing with ServiceNow, what they do is they automate IT services and operations management so companies use their software to automate everything in the cloud just to make it more efficient, operate more efficiently.
And the way they’re going to get to that $4 billion in revenue is by expanding their use cases so now they’re moving the security, customer service, human resources so I think that that’s more of a growth play. They’re growing faster than Salesforce and so it gives you more in the growth play in the cloud.
The other company is NetSuite and they’re in the financial side of it. They make software, Enterprise Resource Planning and so it’s a financial management part of the Enterprise and they’re fast growing.
They compete mainly with SAP (SAP), but they’ve been gaining market share and they also are moving into the e-commerce side. They have a suite commerce product so it’s an e-commerce platform and that’s another company growing about 30% on revenue so that’s another growth play in the cloud.
Steve Halpern: Now there are some highly focused and more specialized areas within the cloud that you find attractive. Such as human resources and human capital management and within this niche you point to Cornerstone OnDemand (CSOD) and Paycom (PAYC). Could you explain what this subsector is and why you like these companies?
Rob Defrancesco: Sure, Cornerstone OnDemand, these are cloud based talent management so they cover everything from recruiting to onboarding, learning, so it’s basically like handling the entire HR side so getting people, acquiring talent and then helping your employees learn and grow within the company.
Cornerstone OnDemand, they focus in the mid to larger markets, mid-sized and larger companies, and their bookings in the latest quarter just accelerated to 32%.
Basically what they’re doing is they have three main products now; learning, performance management and recruiting and their deal says they’re getting bigger because they’re selling more of the solutions on initial sales.
So the interesting thing about Cornerstone is they have an activist investor involved in that one now so there’s been some chatter that they might be a take-over target, but there’s been a lot of consolidation in this HCM -- human capital management -- market over the years.
But Cornerstone has been a survivor and they’re doing extremely well. They have over 25 million people records in the cloud they call it.
Paycom is similar to Cornerstone OnDemand in that it's cloud-based HCM software, but the company goes after smaller accounts -- organizations with 50 employees up to 2,000 or 3,000.
It has been signing some larger deals though -- customers with up to 8,000 employees. Paycom has been opening 5 or 6 regional sales offices on an annual basis, and is now in 42 cities.
The operating model involves having proven sales managers from existing territories open the new offices. New offices/sales teams typically take 24 months to reach full maturity. In 2015, revenue rose 49% to $225 million.
In Q1, revenue of $90.1 million rose 63%. The company's 2016 revenue guidance range of $320 million to $322 million represents 43% growth at the midpoint.
Steve Halpern: Again, our guest is Rob DeFrancesco, editor of Tech Stock Prospector. Thanks for talking with us today.
By Rob Defrancesco, Editor of Tech Stock Prospector