Cloud Stocks – The Dot-Com Bubble of the 2020s?

9

October

2020

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The way of how we do business and work in our day to day life changed dramatically in the wake of the pandemic. Employees leaving their usual workplace and turning their homes into private offices required a switch to a more remote style of work. This, of course, comes with increased demand for cloud solutions which are critical for collaborating with co-workers and teams.

As a consequence, the stock prices of cloud providers skyrocketed since the start of the pandemic. The “Global X Cloud Computing ETF” outperformed the broader stock market 11-fold (Ponczek, 2020) which indicates the extreme demand of investors to participate in the trend. At the same time, cloud IPOs are more popular than ever before. The most recent example is the data-warehouse company Snowflake Inc. The start-up raised $3.4bn in its IPO in September, doubled its valuation to $90bn on the first day of trading while generating a loss of 348.5m at only $264.7m of revenues in the recent year (Henderson and Kruppa, 2020). Notably, Berkshire Hathaway also participated in the IPO what shows confidence in the business model since the fund historically stayed away from such offerings (Henderson and Kruppa, 2020).

For many analysts, it seems that mentioning “cloud” in your business plan already gives you a higher valuation (Ponczek, 2020), similar to the dot-com bubble when hundreds of start-ups raced to be the next digital champion. Also keep in mind that in 2019 already, some cloud stock traded at 17x the projected revenue, exceeding the already high valuations of other tech stocks (Ovide, 2019). Cloud is the future, but it is questionable whether there is enough space for all of those rising stars in the market.

Although the pandemic has accelerated the shift to working from home and the general need for cloud solutions, the fear of a similar burst of a bubble as in 2001 remains. What do you think? Can cloud companies justify their sky-high valuations and deliver value on the long term or is the trend hype-driven?

 

References

Henderson, R. and Kruppa, M., 2020. Snowflake doubles in first trades after largest-ever software IPO. Available at: https://www.ft.com/content/eb8e37c9-b4a5-4b4c-a3cf-2eeac98a8f2b [Accessed Oct 9,].

Ovide, S. 2019. Forget the FAANGs. Pay Attention to the Highflying PUTINs. Bloomberg.com, Available at: https://www.bloomberg.com/opinion/articles/2019-02-28/forget-faangs-stock-bubble-could-be-in-cloud-software [Accessed Oct 9, 2020].

Ponczek, S. 2020. Cloud Stock Mania Comes With Eerie Echoes of Dot-Com Boom and Bust. Bloomberg.com, Available at: https://www.bloomberg.com/news/articles/2020-10-08/stock-market-cloud-company-shares-ipos-see-boom-amid-covid-pandemic [Accessed Oct 9, 2020].

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COVID-19 – Economic Disaster or Catalyst for Digital Transformation?

29

September

2020

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Innovating established business models and bringing them to the digital era – something most companies are well aware of. However, the COVID-19 outbreak has shown that digital transformation has not progressed to a level where working from home and digital business models are the norm. Whereas digital offerings received extraordinarily high demand, many physical businesses had to close temporarily and experienced declining revenue. In Italy, the online sale of groceries grew about 20% from February to March 2020, and JD’s China sales at the beginning of February 2020 were up more than 200% compared to the prior year (Callaghan et al., 2020).

Firms with non-digital business models were forced to adjust to the circumstances and invest quick and heavily into digital initiatives. According to a report published by Twilio, 97% of the participating executives stated that the pandemic had accelerated their digital transformation (2020). Almost four out of five executives said that COVID-19 has led to an increase in their budget for digital transformation (Twilio Inc., 2020). At the same time, the pandemic required many companies to implement WFH for the first time with doubts whether this will lead to a sharp decrease in productivity. However, a majority of the firms found themselves in a situation where 67% of the participants expect remote work opportunities after COVID-19 (Twilio Inc., 2020). The flexibility that comes with WFH could help companies to attract necessary talent, which allows capitalising on their digital strategy.

As we can see, COVID-19 and its consequences started a process for non-digital businesses. The question of their future remains unchanged and whether this process will finally bring to the digital era. Do you think COVID-19 could serve as a catalyst for non-digital companies and help them to innovate successfully? Or will it will the pandemic only accelerate their decline?

References:

Callaghan, S., Loesch, M., Rickert, S. and Teichner, W., 2020. At the heart of a crisis: How consumer-health companies can lead in the time of coronavirus. Available at: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/at-the-heart-of-a-crisis-how-consumer-health-companies-can-lead-in-the-time-of-coronavirus [Accessed 29.09.2020].

(Picture) Morgan, B. 2020. Is COVID-19 Forcing Your Digital Transformation? 12 Steps To Move Faster. Available at: https://www.forbes.com/sites/blakemorgan/2020/04/05/is-covid-19-forcing-your-digital-transformation-12-steps-to-move-faster/ [Accessed 28.09.2020].

Twilio Inc. 2020. COVID-19 DIGITAL ENGAGEMENT REPORT. Available at: https://pages.twilio.com/rs/294-TKB-300/images/UPDATE_Aug_Twilio_COVID-19_Digital_Engagement_Report.pdf [Accessed 29.09.2020].

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