• Reinhardt Coetzee

Cloud Software Results and Correlations in the Tech sector

Over the last few weeks, cloud software stocks reported earnings, at the same time, markets have been sold off due to renewed Covid-19 fears and inflation worries.


On the whole, results have been very good, but they have been overshadowed by generally negative sentiment.


Let's have a look at some of our holdings...


Salesforce.com


Salesforce reported third-quarter results on Tuesday. The results were actually very good with EPS well ahead of estimates. However, the company also said that it expects EPS in the current quarter to be lower than analysts had expected.

This news coincided with another wave of selling of growth stocks, and the share price fell 12%. This may have been an overreaction as Salesforce is still managing to grow revenue at a healthy rate. The company has also completed the acquisition of Slack which adds to the already broad product offering that Salesforce offers.


Zscaler


Zscaler also reported a great set of results. Revenue was up 62%. The results were well ahead of analysts’ estimates, as was revenue guidance for the current quarter. The market liked the results, but the stock eventually got caught up in the market wide sell-off on Wednesday.

Zscaler is a market leader in cloud delivered security. The stock is expensive by almost any metric, so one has to take a long-term view. Companies like Zscaler (and Crowdstrike for that matter) are an integral part of the way modern, growing companies operate. Over time, their customers will grow, and the number of services they provide to those customers will grow too.


CrowdStrike


The market was nervous ahead of CrowdStrike’s results, but the company beat estimates on the top and bottom line for the 12th consecutive quarter. The company is also managing to grow its subscriber base at an impressive rate while maintaining strong margins. Fourth quarter revenue guidance was also raised.

CrowdStrike is a great example of the power of compounding. Over the last five years, revenue has grown at between 80 and 125% - however the compounding effect has resulted revenue growing 22-fold from $52 million to $1.1 billion. In that period, free cash flow has grown from negative $52 million to over $500 million too.


Snowflake


Snowflake has been the standout cloud stock and appears to be winning in the data management space. The stock price gained nearly 16% on Thursday after the company reported revenue growth of 110% - both as a result of new customer acquisition and increased sales to existing customers. Interestingly, Snowflake is seeing very strong growth from customers in several regions including Asia and Europe.

Cloud data storage is a big industry with a lot of competition. Snowflake is unique in this space in that it helps customers manage data across multiple platforms. This strategy seems to be working and the company has seen big upgrades from several analysts.


Correlations in the Tech Sector


Over the last few months there has been a noticeable breakdown in the correlations between the price movements of shares in the technology sector. I was interested to see how this compares historically so I put some data together. The following chart tracks the average correlation between the daily returns of the technology stocks with the Nasdaq 100 index. The correlation is calculated over a rolling 100-day period so there is a bit of a lag.

Currently correlations are near the lowest they have been in a decade, although they were lower in 2017. The highest correlation tends to occur during corrections (March 2020 was the highest level since 2012) but correlations can also rise during broad based rallies.

The implication is that during periods of low correlation, stock selection becomes more important in generating returns.

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Stock returns for portfolio and individual  trade returns correct as of 2022/02/03

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