Introducing The New Cloud Generation
When The Going Gets Tough ...
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The New Kids On The Block
First, a little context. As you will know if you’ve been with us awhile, we’re old folks here at Cestrian Capital Research. This here cloud thing isn’t our first rodeo, and neither is this here yikes-sell-all-stonks-quick-before-the-world-ends thing. Our pro investing careers date from the dawn of time ie. before cloud was a thing. When client-server was the hot new platform that got everyone all excited.
Now, as the late 1990s gave way to the 2000s, something called an ‘Application Service Provider’ was what was New And Cool. This sounds like cloud, but it wasn’t. It was a server at the end of a T-1 line (if you were lucky) or a 128Kbps bonded ISDN line (if you weren’t) that could connect to your client-side PC. It didn’t quite come with a dialup phone and a modem cradle, but it wasn’t that much further along.
The main thing was that it remained essentially a one-to-one system. One database, one application instance, one device, one user. Which meant, of course, that it couldn’t scale - not physically (because you just needed to keep replicating the hardware and software instances as the user count grew) and not financially (for the same reason). So in the end this model was a bust.
After a number of false dawns, the commercial breakthrough was Salesforce ($CRM), then known as Salesforce.com because the dot-com suffix in the name indicated that you were One Of The Cool People. Not neurotypical cool. Just, valley cool. Which soon became Wall Street Cool. Salesforce achieved two critical things that were and are the key to cloud software scalability. Technically, they led with a multi-tenanted database, which meant that multiple customers could use a single database instance without egregious levels of data security risk. And financially, they led with a subscription model that saw clients paying on the drip instead of upfront. Yes, yes, youngsters, this is all old hat today. But back then it was such an eye-opener that CRM’s byline was:
Their “phone number” (noun - “network addressing system that predated IPv4”) was 1-800-NO-SOFTWARE. You get the point.
Since around 2010, cloud deployment and revenue models have become increasingly dominant in enterprise software. The tipping point came a couple years later when Microsoft switched its Office licensing model from upfront to on the never-never. And investors have learned all about the joys of recurring revenue since then.
Nowadays, everyone knows the cloud names. Salesforce still, Adobe has rebranded itself that way, as has Microsoft, Amazon, and more obscure specialists such as Autodesk, Synopsys, Cadence, etc etc. There is, was, and has only ever been cloud. All former architectures have been purged from history.
Switching Up The Landscape
Nothing changes the vendor landscape in software better than a good crisis. One of the reasons cloud won favor in 2010 and beyond - it wasn’t new then, it had been growing quietly since 2002-3 - was that corporate capex budgets were smashed by the 2008-9 financial crisis. If you could sell apps on the drip and have them paid for by workgroup credit cards not the Big Bad CFO, you got in the door faster and you stayed in the door. Then grew from within. ‘Land and expand’ it was called. Before your grumpy CFO or CIO knew it, Acme Megacorp was already spending $1m/yr on CRM, just spread over twenty credit cards. So it was cheaper to start doing enterprise-scale deals with the Chief Surfing Officer Mr Benioff himself.
Well, now we have another doozy on our hands. Money is starting to cost something again and there aren’t enough workers around to implement large scale enterprise software deployments, on account of everyone having YOLO’d enough crypto to quit, buy an RV and spend the rest of their days dodging Covid variants by living exclusively in the desert. Taken together this means the enterprise is in our view going to look further down the cost curve in software. The gulf between Benioff and Ellison software costs is smaller now, and so point vendors that sell into those same departmental skunkworks are becoming popular once more. Hence the rise of Digital Ocean ($DOCN), GitLab ($GTLB) and others.
We believe that the current environment, as difficult as it may prove for some investors and indeed companies, will be the foundation upon which is built the next generation leaders in cloud software. The pioneers - the post-dot-com-crisis OGs we talk about above - will continue to grow we think, and we expect to own names such as these in staff personal accounts for plenty of time to come. But the highest growth names going forward will, we think, be those stocks that IPO'd in the last 2-3 years and are presently growing in excess of 30% pa, oftentimes in excess of 50% pa. Many are cashflow positive; many have rock-solid balance sheets that require no external funding for the growth to continue.
Our initial picks - long term investment opportunities that we believe can be accumulated from this point on with a multi-year hold in mind - are below. And in this time of market uncertainty we cannot stress enough that blowing your full allocation on these names on day one and hoping it works out is a risk-fraught strategy. Yours to YOLO if you choose; but consider dollar-cost-averaging into these names; consider only buying deep dips; consider hedging; use stop-losses - and so on. Above all this is a time to preserve capital not blow it up. If we get a deeper drop in the market before it rebounds, you want your powder dry. We believe these names have 10+ years of growth ahead of them and we believe they can be held that long if you so desire, with the goal of chalking up strong returns (likely at the expense of some volatility).
We have covered each of these stocks since IPO and maintain fundamental financial models - updated immediately on earnings releases - and stock charts with price outlooks and stop-loss levels which we revisit regularly.
You can access our pro-grade coverage of these names in two of our services.
Cestrian Tech Select - that’s right here. The pay version of this service - on sale in July for 1/3 off, meaning, just $99/yr for as long as you’re a member - will feature regular updates on each of these names - earnings reviews, chart refreshers, and so forth. If you’ve yet to sign up to the pay version, you can do that at the link below (which includes your discount).
Or - the Big Kahuna -
Growth Investor Pro - gives you continuous, real-time coverage plus a HUGE amount of other stuff - ETFs, value names, commodity ideas, and in particular a wonderful membership group that works together in the chatroom to help everyone win together. The service also includes Trade Alerts which give you a heads up that Cestrian staff accounts are about to make a trade in a covered stock - we tell you if we’re buying or selling and the alert comes before the trade is placed, so you can trade ahead of us if you want to. And you get two live webinars per week, open-mic, anyone asks anything, where we discuss the market, single-name stocks and ETFs, tech trends, whatever comes up. All from just $125/mo. You can learn more about Growth Investor Pro, here.
Now, for our pay members here, let’s open coverage of our New Cloud Generation names.