Blogs -I/O Fund Q3 2021 Cloud Stock Earnings Preview – December Edition

I/O Fund Q3 2021 Cloud Stock Earnings Preview – December Edition


November 25, 2021

Bradley Cipriano

Equity Analyst

Tech earnings season is long and extends over six weeks. We are finally nearing the end of Q3 earnings season as the last round of cloud companies are expected to report in early December. The I/O Fund had previously highlighted Six Cloud Stocks to Watch During Q3 Earnings, all of which have since reported Q3 results.

One of the notable performers we highlighted was Bill.com, which reported an 11% topline beat during the quarter. I/O Fund analyst Bradley Cipriano discussed the company’s strong Q3 results in a short video presentation here.   

In the analysis that follows, we provide an update on the cloud category and review cloud stocks that have yet to report Q3 earnings. We also discuss key metrics that investors should be aware of heading into the final weeks of Q3 earnings season.

Cloud Stocks: Top 10 EV/FWD Revenue Multiples

Below is a table of cloud stocks that have yet to report Q3 results, ranked by their EV/FWD sales multiples. Snowflake has the richest multiple out of the 26 remaining cloud stocks set to report in the next few weeks. As we mentioned in our initial Q3 Cloud Earnings Overview, Snowflake is benefitting from increasing rates of data consumption, a trend that will likely continue into the future.

Somewhat cheaper than Snowflake but still sporting a premium multiple are Asana, Zscaler, and MongoDB. Asana most recently grew 72% YoY, an acceleration from the 61% and 57% YoY growth rate in Q2 and Q1, respectively. Zscaler sales grew over 55% for three consecutive quarters and sales are expected to grow 50% in the upcoming quarter. MongoDB has reported an acceleration in sales for three consecutive quarters, and the most recent 44% YoY growth was the fastest pace of growth since Q1 2020. These strong growth trends help illustrate why these firms have premium valuations.

Cloud Stocks: Top 10 Three-Month Forward YoY Growth Rates

Below is a chart of forward sales growth expectations.

Out of the remaining cloud stocks that must report Q3 earnings, Snowflake and Kingsoft are expected to grow the fastest. Snowflake is expected to grow sales 92% YoY as the company continues to benefit from rising rates of data consumption.

Chinese cloud infrastructure company, Kingsoft, is also expected to grow sales strongly in Q3 as they quickly scale their operations.

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Other noteworthy mentions are CrowdStrike, Okta, and Zscaler, all of which have exposure to cyber security, a sector that has seen outsized growth recently. These three cyber security firms are expected to grow sales ~50% YoY heading into Q3 earnings, highlighting the overall strength in the cyber security market.

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 11/19). Zscaler is a notable stand out and increased 6% during the week. It is up 85% YTD. Out of the 26 cloud stocks that have yet to report Q3 earnings, Zscaler and Snowflake were the only stocks that advanced last week.

Top 10 Changes in Sales Growth Estimates – Last 90 Days

The table below ranks cloud companies that have yet to report Q3 earnings 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.

Smartsheet (SMAR) has had the largest topline revision, as the company recently increased their Q3 sales guidance from 40% YoY growth to 46% YoY growth, citing a robust demand environment for its platform.

Zscaler also had its topline revisions increase 5% over the last 90 days, above other cyber security players such as CrowdStrike and Okta. This increase in expectations signals that Zscaler is likely expected to outperform its peers in the near term.

 

Update on Top 5 EV/Fwd Revenue Multiples:

Overall stats:

  • Overall Cloud forward median:    15x
  • Top 5 Cloud forward median:       69x
  • Overall Cloud forward average:  22x

OVERVIEW OF EV/FWD SALES:

As shown below, the median and average cloud EV/Fwd revenue multiple has trended up throughout the year. Around June, the average multiple had started to increase faster than the median, and this bifurcation accelerated during Q3 earnings.

The average is being driven higher by premium valued cloud stocks (shown above). Since cloud has increasingly proven to be a sector where the leader ‘wins most’, this bifurcating trend may very well continue into the future.  

 

TOP 5 HIGH-RANKING 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 through Q3 earnings. Investors likely continue to believe that cloud is 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.  

WHO DELIVERS SUPERIOR EV TO FWD SALES?

The below chart provides a more holistic view of the remaining cloud stocks that have yet to report Q3 results, sorted by their EV to Fwd revenue multiples.

As highlighted in the above tables, Snowflake (SNOW) has the highest valuation of the group and its multiple is more than 600% higher than the cloud median of 15x.

Growth Adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth)

The last chart (below) 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, based on their expected growth rate. A low value in the chart below means that a company is cheap relative to growth.

For example, Snowflake can be considered cheaper than Asana once we consider its strong growth rate expected next quarter.

Kingsoft (KC) is evaluated as the cheapest; given its robust growth rate and low valuation, the company has very low margins, which warrants a cheaper valuation.

 

CLOUD OUTLOOK

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 3% FCF margin.

 

Strong growth and positive cashflows signal that the cloud category is healthy and performing well. I/O Fund expects this strength to progress going forward.

Find out which cloud stocks I/O Fund will be watching, heading into the final weeks of Q3 earnings, in analyst Royston Roche’s piece, “I/O Fund’s Q3 Earnings Preview of Cloud Stocks -December Edition.

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