The Cloud Times 100, which tracks cloud companies, has revealed an important truth about 2013 and the cloud. Leadership is changing. It's no longer about the arms dealers. Now it's about the applications. A statistical analysis by Louis Columbus at Forbes shows this clearly.
The cloud stocks that have done best so far this year are, in order, Netsuite (N), CA Technologies (CA), Amazon.Com (AMZN), Qualys (QLYS), and Workday (WDAY). What do these companies have in common? They're offering applications. Netsuite does financial and ERP applications. CA does a host of software applications. Amazon.Com is its own application - most of its cloud capacity is used to drive its e-commerce systems. Qualys does security. Workday does human resources management.
Here is how they stack up individually:
Netsuite is, in some ways, an Oracle (ORCL) spin-off, only in a more direct way than Salesforce.com (CRM). Like Salesforce, it bases its offerings on Oracle databases, and has an alliance agreement with Oracle. One difference is that Netsuite's connections to Oracle are far closer. Oracle CEO Larry Ellison was a founding investor and entities he controls hold 44% of the stock.
For the year so far, Netsuite is up 45%, and it has shown steady top-line growth. It did a private offering of $270 million senior notes in the second quarter, which are convertible into common stock. The money gives it a war chest for acquisitions, like TribeHR, which turns it into a competitor with Workday.
While the company is not profitable, it has thrown off almost $300 million in operating cash flow over the last two quarters, which means the business model works.
I have often called Oracle's cloud stack "faux cloud," but the success of partners like Netsuite and Salesforce.Com illustrate just how Oracle thinks it will win the cloud wars - by getting in front of it through applications. It's a compelling story.
CA is doing much the same thing as Netsuite. It is managing a tricky transition by pushing what once were client-server applications as cloud, but it's a necessary one and, so far, successful.
Just like Netsuite, CA is up 45% so far this year, and has now crossed its 2004 high point of $31.51/share. Unlike Netsuite, CA is a regular profit churner, with margins approaching 25%. Its old-line heritage means it's not valued as a cloud company - its Price/Earnings (P/E) of 13.58 is barely in line with the market. The balance sheet shows relatively less debt that Netsuite but no pressing need to raise more. What it mainly needs to do in order to get a cloud P/E is to get real growth, which it's not yet doing. Old businesses are dropping off as new ones take their place, but basically the top line is just treading water.
While Netsuite may be considered "faux cloud" for its reliance on Oracle hardware, CA may be considered "faux cloud" because it's based on old-style software. That doesn't mean you can't make money on it.
Amazon you know. There's little I can add to the story. The heart of the story is its e-tailing dominance, its use of cloud technology for its own purposes, selling both physical and digital goods. The froth in the stock is owing to its re-sale of cloud technology, and the value of its cloud business along has been estimated to be as high as $19 billion by Macquarie. But even that's barely more than a rounding error on a $163 billion market cap.
This is real cloud, a great demonstration of what's possible using the technology, but the case for Amazon shares is its growth in selling goods and services, not its cloud operations.
Qualys is more of a pure cloud play. With a market cap that is still under $700 million, it's a midget next to the other leaders identified by Cloud Times.
Qualys also has the financials of a near start-up. It's barely at break-even, and its sales remain under $100 million/year. But that is up by more than half from 2010, total assets are climbing like a hockey stick, from $50 million in 2010 to over $150 million last year, and it's OK on a cash basis.
What excites about Qualys is the business it's in - cloud-based cloud security. Its Qualys Cloud Platform automates a host of functions, from identifying assets to complying with software licenses. But I think some folks misunderstand Qualys, as the key to its success lies in the dying client-server architectures it protects, rather than the new cloud architectures. I'm not very interested in the future's protection of the past - I'd rather see the future kill the past with my money.
Finally, we have WorkDay. Its shares are up 42% this year, it went public less than a year ago, and it's a true cloud-based cloud application.
That application is called Human Capital Management, the business of acquiring, retaining, and compensating employees. Workday began life on Amazon's EC2 cloud platform, although it has bought some Hewlett-Packard servers for internal development , something that angered Amazon CEO Jeff Bezos until he understood it.
Workday makes four times more than Qualys on its top line, although it has yet to turn a profit. The amount of business it does a quarter is up over 50% over the last year, and since this is a Software as a Service company it's not a seasonal business, meaning growth is steady. It took out its first debt in the quarter ending July, but has enough cash and short-term investments on hand to pay it back if it needs to. By using debt to fund growth instead of selling stock, Workday gives its shareholders a break - it's not diluting their investment. There were, as of this writing, just 173.5 million shares outstanding.
These companies all illustrate the larger point of where cloud is heading - toward applications. If pressed to pick a favorite for investment I'd go with Workday, although I don't think there's a long-term loser in this whole cloud stack.