Blogs -How to pick winning cloud software stocks in 2020

How to pick winning cloud software stocks in 2020


January 15, 2020

author

Beth Kindig

Lead Tech Analyst

Back in December, I wrote an article on how to pick winning cloud software stocks. I began by pointing out how – on average – cloud software companies have reported 10 to 20 times better revenue growth compared to S&P 500 Index companies, most of which grew at an average rate of 5.2% in the last quarter.

Those are certainly impressive numbers, but investors weren’t interested in growth. What they wanted were companies that posted positive EPS numbers, particularly those that have at least 10% forward growth. This was the market’s response to cloud software stocks with high valuations in 2019, and I believe that it will carry over this year.

I first noticed the trend when investors began leaving cloud software stocks due to a combination of low profitability and high valuations. This was puzzling because cloud shares had beaten most analyst estimates.

A few examples of the trend favoring positive EPS include:

  • Microsoft has positive EPS, with acceptable growth and a reasonable enterprise-value-to-sales (EV/sales) ratio of 8.4. The company’s stock price is up 51% this year, more than double that of the cloud ETF.
  • Splunk also gained ground recently and is up 19% since Nov. 15, suggesting the stock was undervalued previously, given its positive and growing EPS. Five9 also meets the criteria of positive EPS, with guidance for 11% growth. The stock is up 50% this year.

Examples of the trend penalizing negative EPS include:

  • CrowdStrike is an example of negative EPS combined with a high EV/sales valuation. The stock is down 51% from its high of $99 and is down 24% from its opening IPO price of $63.50. The company currently has one of the highest EV/sales of the companies in the table above, and at its peak in August and July, had a whopping EV/sales ratio of 61.
  • Yext is a cautionary tale of a company with negative EPS that the market abandoned at the first sign of weakness. The company is trading 35% lower from its high in July.
  • PagerDuty  has tumbled 60% from a high in June and is down 38% from its IPO opening price of $36.75.

So what happened?

In the article, I explained that start-ups are designed to grow fast; with the average company forecasted to grow 178% in revenue during their first year. The trouble is when these companies need to transition from fast sales growth to stable, consistent profits. Furthermore, SaaS companies, on both private and public markets, use different metrics based on their business model, further complicating the situation.

Investors dealt with these issues by focusing on EPS growth rather than raw revenue numbers. Not only did this strategy allow them to find cloud software companies that deliver steady, consistent growth, it also simplified different variables by rewarding companies that have positive and healthy EPS growth.

Read the full article here.

head bg

More To Explore

Newsletter

Orange toolbox labeled 'ServiceNow' with digital interface displaying AI and data analytics dashboard, surrounded by various tools.

ServiceNow Q2 Earnings: Inside the AI Push Toward $1 Billion ACV by 2026

Last month, after ServiceNow reported second quarter results that exceeded expectations on multiple fronts, shares of NOW rose by 6%. The company is attempting to reposition itself beyond a provider o

August 14, 2025
Silhouette of a bull in front of a glowing Bitcoin coin, symbolizing a cryptocurrency bull run with potential market risks.

Is Bitcoin’s Bull Run Nearing a Top? What the Herd Missed at $16,000 and is Missing Now 

In late 2022, when Bitcoin was trading near $16,000, the I/O Fund issued a Strong Buy Alert. At the time, many of the market’s biggest crypto bulls were silent. Fast forward to today, Bitcoin is up ov

August 08, 2025
S&P 500 market forecast showing potential correction signs and key buy levels for 2025, based on technical analysis and investor sentiment trends.

Is the S&P 500 Overdue for a Correction? 2025 Forecast & Buy Levels to Watch

In our last Broad Market Report titled, Historic Uncertainty Meets $7 Trillion Dollar Debt Wall: What Comes Next For The S&P 500, the S&P 500 was trading near 5800 and still well below its February hi

August 01, 2025
A puzzle visually depicting different tech platforms and investments influencing search market share

Google Stock Clears Major Hurdle, Yet One Serious Concern Remains

This week, Google cleared a major hurdle with Search accelerating from 10 points of growth last quarter to 12 points this quarter -- putting to rest many doubts that Search monetization is at risk giv

July 27, 2025
Oracle stock forecast exploring potential to reach $1 trillion valuation as AI demand grows

Can Oracle Become the Next $1 Trillion AI Stock?

When it comes to AI cloud leaders, Oracle is not often mentioned, yet the company is quickly positioning itself to lead among Microsoft, Amazon and Alphabet when it comes to cloud growth over the next

July 18, 2025
Robinhood crypto trading volume vs. transaction revenue Q2 2025

Robinhood Stock: Spot Crypto Volumes May Lead to Incoming Volatility

Robinhood’s fundamental transformation over the past two years has been nothing short of remarkable. Crypto is driving strong revenue growth at 50% YoY in Q1, while TTM operating margin is approaching

July 11, 2025
Beth Kindig, Lead Tech Analyst at I/O Fund, interviewed on Fox Business discussing Nvidia’s earnings beat and solid guidance.

AI Stocks in 2025: What Every Investor Should Know

The market evolves quickly, and nowhere is that more apparent than in AI stocks, which continue to lead in both innovation and returns. At the I/O Fund, our deep coverage of AI stocks, combined with a

July 03, 2025
Modern data center building next to a nuclear power plant cooling tower.

Nuclear Power Emerging as a Clean AI Data Center Energy Source

Data center power demand is forecast to surge over the next decade, with some estimates seeing demand increasing 3x by 2030. Inference is expected to be a primary driver with power demand growth proje

June 27, 2025
Nvidia vs. AMD CEOs in AI GPU race, spotlighting AI inference competition.

AMD vs Nvidia: The AI Stock That Could Win by 2028

Last week, AMD offered more details on the release of their groundbreaking GPUs with little fanfare in the markets – which is par for the course as AMD has a history of being forgotten about until the

June 20, 2025
AI chip powering data growth with green upward graph, symbolizing semiconductor and AI market expansion

This AI Stock is Set to Surge from Inference Demand

Up until now, the AI conversation has been dominated by training and compute, yet inference is showing signs of exploding growth. Microsoft and Google recently highlighted 5x to 9x YoY growth in AI to

June 13, 2025
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2025