Blogs -I/O Fund’s Cloud Q4 2021 Earnings Overview

I/O Fund’s Cloud Q4 2021 Earnings Overview

January 28, 2022


I/O Fund


Cloud reports in two waves, with the first wave of Q4 earnings ramping this week. Microsoft was the first to report on January 25th, and strength in cloud sales helped the company beat expectations. Specifically, Azure and other cloud services revenue increased 46% YoY in the quarter, which drove consolidated sales growth of 20% YoY, beating topline estimates by 2%. In the analysis that follows, I give a brief overview of the cloud industry and discuss key metrics that investors should be aware of heading into Q4 earnings.

Cloud: Top 10 EV/FWD Revenue Multiples

Below we ranked cloud stocks based on their EV/NTM sales multiples. Snowflake (SNOW) has the highest multiple in the cloud sector, as the cloud platform provider most recently reported accelerating topline growth coupled with improving retention and other key metrics. Snowflake is benefitting from increasing rates of data ingestion in the cloud environment, a secular tailwind that will likely continue to be strong in the near term.

SentinelOne (S), Zscaler (ZS) and Cloudflare (NET) follow Snowflake’s valuation and have been rewarded a relative premium in the cloud category. Each of these companies provides cybersecurity solutions, which is a market that will likely continue to see strong demand as companies increasingly digitize and migrate online. As companies move online, their attack surfaces increase, driving demand for cyber security solutions.

It is noteworthy that cloud valuations have normalized in 2022 following the heightened volatility in financial markets. Nonetheless, these leading cloud companies highlighted below will likely continue to report robust growth in the near term as cloud adoption remains a strong secular tailwind for the foreseeable future.,format

Cloud: Top 10 Three-month Forward YoY Growth Rates

Below is a chart of forward sales growth expectations for cloud stocks expected to grow the fastest in the upcoming quarter. (BILL) is expected to report the fastest growth rate in our cloud universe heading into Q4 earnings at nearly 140% YoY. However, recently completed its acquisition of Invoice2go, which impacts the company’s as-presented topline growth rate.

Absent M&A,’s sales are still strong and recently grew 78% YoY on an organic basis, up from the 73% YoY organic growth rate in the prior quarter.  Also noteworthy are the differing growth rates between and Asana, two work productivity platforms that are both rapidly growing.

Sign up for I/O Fund's free newsletter with gains of up to 1100% - Click here is expected to grow sales 75% YoY to $88 million while Asana is expected to grow sales slower at 54% YoY to $105 million in quarterly sales. The next few quarters will likely shed light on which platform is the leading work productivity solution going forward. Strength in enterprise will be a key metric to monitor to gain insight into which company  is the leading work productivity platform.,format

Top 10 Weekly Share Price Movements

Below is a table of the weekly change in share price for our universe of cloud stocks (week ended 01/21). Markets have been volatile and every cloud stock in our universe was down last week as the Nasdaq declined by 7%. However, there were some relative outperformers, such as Workday (WDAY) and Zuora (ZUO), both of which support back-office operations, and the market may be expecting these companies to perform well given the labor shortage. Furthermore, Anaplan (PLAN), Box (BOX) and Dropbox (DBX) have also outperformed well on a YTD basis, and were up 4%, 2% and 3% relative to the Nasdaq’s 7% YTD decline. Lengthening the timeframe to 1-year and Box has performed the strongest of the three and is up 38% YoY. Likely contributing to its outperformance, Box has reported three consecutive quarters of acceleration topline growth, with sales rising 14% and billings increasing 25% YoY in Q3. The outperformance in billings suggests sales may continue to accelerate, and management guided for Q4 sales to accelerate to 15% YoY.,format

Top 10 Changes in sales growth estimates – last 90 days

The table below ranks cloud stocks by their topline revisions over the last 90 days. An increase in topline revisions signals that the Street believes that the company will grow faster than initially believed, which can result in outperformance. Confluent (CFLT) has had a 16% topline revisions over the last three-months, which leads cloud stocks. Confluent raised its FY2022 sales guide in November by 8% at the mid-point and also announced a partnership with Alibaba in December, both of which likely contributed to the higher topline estimates. Another standout is New Relic (NEWR), which saw a 9% rise in estimates over the last 90 days, driven by a strong earnings report as the company reported an acceleration in sales and guided for a further acceleration in Q2. New Relic’s shares are up 27% over the last three-months as the company recently revamped its product offering and migrated to a consumption billing model. Time will tell if the recent changes resulted in sustainable growth or if the recent changes provided only a short-term boost to growth.,format

Update on EV/Fwd revenue multiples:

Overall stats:     

  • Overall cloud forward median:   8x
  • Top 5 cloud forward median:      24x
  • Overall cloud forward average:  10x


As shown below, the median and average cloud EV/NTM sales multiple was trending up throughout 2021 but has since corrected in 2022 to levels last seen in early 2020. For instance, the median cloud EV/NTM revenue multiple was 8x in the most recent week, which is below the 9x median cloud multiple in May 2020. Furthermore, the delta between the average and median multiple has narrowed recently as the top valued cloud stocks have had their valuations compress, reducing the distortion on the average calculation. If Q4 growth comes in strong for the cloud category, expectations for forward growth will likely be revised higher, leading to a recovery in valuations.,format


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 expand since 2020. However, the top 5 valued cloud stocks have had their valuations halved since November. The median cloud stock has also experienced a multiple compression in recent weeks.,format

EV TO FWD Sales Growth Buckets:

We can further dissect the change in cloud valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The below chart shows the historical valuations for stocks in various growth buckets. Each growth bucket has had their valuations compress since November, with the high growth bucket experiencing the steepest decline. The market may be expecting a deacceleration in growth in the near term, which would explain the correction in high growth valuations. If growth in cloud remains robust in Q4 and estimates come in strong, then valuations may rebound in the next few months. Microsoft’s strong cloud results discussed above suggest that cloud will continue to grow strongly in the near term.,format


The below chart provides a more holistic view of the cloud landscape heading into Q4 earnings, sorted by EV to Fwd revenue multiples. As mentioned above, Snowflake (SNOW) sports a premium multiple, driven in part by its accelerating topline, followed by three cyber security firms: SentinelOne (S), Zscaler (ZS) and Cloudflare (NET). Snowflake’s premium multiple is 380% above the cloud median of 8x, which may be warranted given its triple-digit accelerating topline growth rate.,format

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 below chart means that a company is cheap relative to growth. Note that some names may be skewed due to acquisitions. It is interesting to note that Snowflake drops from having a 380% premium valuation relative to the median to a 33% premium after taking into account its strong growth rate. Alteryx and Splunk move to being some of the most expensive cloud stocks once we factor in their forward growth.,format

Finally, the last table we will be discussing includes aggregate cloud operating metrics. The below table illustrates the median topline growth, margins and FCF generation for the cloud industry. The median growth rate was 36%, and the market expects the median cloud stock to grow sales by 28% YoY in Q4. Gross margins remain robust at over 73% and cashflows are slightly positive at 3% of three-month sales for the median cloud company.  Cloud remains a category exhibiting rapid growth, with strong margins but relatively low cashflows. As the category matures, cashflows will likely materially improve, rewarding investors in the long run.,format

While cloud valuations have been volatile in recent weeks, the category remains one of the fastest growing areas in the market. The I/O Fund believes in the long-run success of the cloud category, and we remain invested  Find out what the Street is saying about cloud stocks headed into Q4 earnings in our I/O Fund’s Preview of 7 Cloud Stocks for Q4 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.

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