I/O Fund’s Cloud Q3 2021 Earnings Overview
November 05, 2021
I/O Fund
Team
In the analysis below, we give a brief overview of our universe of cloud stocks and discuss key metrics that investors should be aware of heading into Q3 earnings.
Cloud Stocks: Top 10 EV/FWD Revenue Multiples
Below is a table of cloud stocks ranked by their EV/FWD sales multiples, along with their most recent YoY growth rate, gross and free cashflow (FCF) margins. Cloud has been a strong category for growth recently, which has rewarded the top performers with premium multiples
Cloudflare (NET) has the highest EV/FWD sales multiple in our universe of cloud stocks. The company has made some announcements around object storage costs recently, which could be impactful for the company going forward.
Snowflake is right behind Cloudflare at a 91x EV/FWD Revenue multiple. Snowflake grew sales over 100% in Q2, and its net revenue retention rate was 169% during the quarter, highlighting the company’s success in capturing market share. Management attributed the strong results to increased customer data consumption, a trend that will likely continue into the future.
Cloud Stocks: Top 10 Three-month Forward YoY Growth Rates
Looking forward, Bill.com (BILL) and Snowflake are expected to be the fastest growing cloud stocks in our universe. BILL’s expected growth rate is skewed by its recent acquisition of Divvy, and excluding the acquisition, organic growth is expected to be ~60% next quarter. Snowflake is expected to continue to report strong growth of 92%, similar to the 104% growth it reported in the most recent quarter. As mentioned above, Snowflake is benefitting from a secular tailwinds as enterprises increase their data consumption.
Top 10 Weekly Share Price Movements
In the table below, we ranked the cloud stocks that saw the largest one week increase in their share price. Shopify (SHOP) has been a top performer this past week, as the stock rebounded after a slight sell-off following its Q3 results. Microsoft (MSFT) also reported last week and the market reacted by increasing its market cap to $2.5T, surpassing Apple as the most valuable company in the world.
Sign up for I/O Fund's free newsletter with gains of up to 1100% - Click here
The I/O Fund has covered Microsoft in detail since 2018 when Beth explained Microsoft’s hybrid strategy when she boldly stated that Azure could overtake AWS on cloud IaaS. Microsoft’s hybrid cloud approach has allowed the company to outperform its peers and positions Microsoft well to continue to take share in the hyper-growth cloud market.
Top 10 Changes in sales growth estimates – last 90 days
The table below ranks the cloud companies that have had the largest revisions to their forward topline growth expectations over the last 90 days. As mentioned above, Bill.com (BILL) recently completed a series of acquisitions which contributed to an outsized increase in its sales expectations. Similarly, Qualtrics (XM) recently completed its acquisition of Clarabridge, which has led to an upward adjustment in its growth rate. Datadog’s (DDOG) estimates have increased 9% over the last 90 days and its stock price has also increased nearly 50% over the same time period. The market is likely pricing in strong growth for the company as Datadog continues to lead in the cloud observability category.
Update on EV/Fwd revenue multiples:
Overall stats:
- Overall Cloud forward median: 16x
- Top 5 Cloud forward median: 65x
- Overall Cloud forward average: 22x
EV/FWD SALES:
As shown below, the median and average cloud EV/Fwd revenue multiple has trended up throughout the year. The average multiple has started to increase faster than the median, as the top valued cloud companies have experienced a sharp rise in their multiples in recent months.
Top 5 EV/FWD SALES:
In the chart below, we can more clearly see the large dispersion in cloud valuations, as the top 5 premium valued cloud stocks have had their EV/Fwd sales multiples rapidly expand since May 2021 and are now at new highs. The cloud category is often considered to a be a “winner gets most” market, where the market leader captures the majority of the addressable market. This dynamic helps explain why the top 5 valued cloud stocks have grown their multiples much faster than the median.
EV TO FWD SALES Growth Buckets:
We can further dissect the changes in cloud valuations by breaking up the group into high growth (>30% growth), mid growth (>15% and <30%) and low growth (<15%). The below chart shows that higher growth cloud stocks receive a higher multiple from the Street. Furthermore, high growth stocks used to be valued more richly back in Q4 2020 but have since seen their valuations normalize to a lower multiple. If Q3 cloud earnings come in strong, then the market may push valuations back up to their historic highs.
Top 30 EV TO FWD SALES:
The below chart provides a more holistic view of the top 30 valued cloud stocks based on EV to Fwd revenue estimates. Cloudflare (NET) and Snowflake (SNOW) have the highest valuations of the group and are valued more than 500% higher than the cloud median of 15x. As mentioned above, NET and SNOW are benefitting from trends that are expected to continue to result in robust growth going forward, such as cloud storage costs and data consumption.
Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth):
The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the chart below means that a company is cheap relative to growth. For example, SNOW dropped from being one of the most expensive stocks to being valued closer to the median once we take into account its strong growth expected next quarter.
Finally, the last table we will be discussing includes aggregate cloud operating metrics. The below table shows that cloud is performing strongly as the median forward growth rate is above 20%, while gross margins are high at over 70%. The median cloud company is also FCF positive with a 6% FCF margin.
Strong growth and positive cashflows signal that the cloud category is healthy and performing well. The I/O Fund expects this strength to continue going forward. Find out which the Street has been saying about cloud stocks heading into earnings. “Overview of 6 Cloud Stocks for Q3 Earnings”
The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.
Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
Gains of up to 2,390% from our Free Newsletter.
Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!
+2,390% on Nvidia
+450% on Bitcoin
*as of Jun 25, 2024
Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.
If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 3,900% on Nvidia, 850% on Chainlink, and 695% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.
More To Explore
Newsletter
Mag 7 Stocks Should See One More High
Optimism around the Fed could spark a continuation of the relief rally in the Russell 2000 and further rotation out of the Mag 7. Below, we look at the pros and cons of a Mag 7 rotation and how we pla
Palantir’s Stock Is Priced For Perfection
Heading into 2024, Palantir was exhibiting “multiple signs of acceleration” stemming from strong growth in its US commercial segment, driven by AIP, Palantir’s Artificial Intelligence Platform that le
Tesla’s Q2 Deliveries Strong, But What’s To Come?
After months of being the lowest performing Mag 7 stocks, Tesla saw rapid gains — up 42% in a one month rally, with 37% of those gains in eight sessions — after it reported Q2 deliveries ahead of expe
How to Participate in Tech: The Million Dollar Question (Video Highlights)
With audited returns of 131% since inception, compared to the NASDAQ-100’s 82%, portfolio manager, Knox Ridley, lays out how we have successfully maintained an overexposure to the right tech stocks, w
This AI Stock Could Outpace Nvidia’s Returns by 2030
Lead Tech Analyst and CEO Beth Kindig recently joined Real Vision’s Nico Brugge to discuss her AI outlook on leading AI stock Nvidia, while sharing which AI stock she believes may outpace Nvidia’s ret
AI PC Stocks: Emerging 2024 And 2025 Story
Currently, there is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities at the edge.
AI Power Consumption: Rapidly Becoming Mission-Critical
Big Tech is spending tens of billions quarterly on AI accelerators, which has led to an exponential increase in power consumption. Over the past few months, multiple forecasts and data points reveal s
With Bitcoin at All-Time Highs, Here’s What’s Next for COIN, HOOD
Bitcoin and the spot BTC ETFs have clearly seen strong investor appetite since the approval in the beginning of the year. Alongside strong initial adoption of the new ETF class, we’re also seeing majo
Here's Why Nvidia Stock Will Reach $10 Trillion Market Cap By 2030
I believe Nvidia can achieve an astonishing $10 trillion market cap by 2030. As you’ll see from the key points to my thesis, there is a bull case where a $10T market cap estimate in a little over six
Taiwan Semiconductor Stock: April Sales Soar From Advanced Nodes
Despite warning of a slowdown in the broader semiconductor industry this year, TSMC’s April sales surged 60% YoY and 21% MoM. This marks a positive start to the 20-percentage point acceleration to 33%