Business

Cloud software is a ‘battle for a knife in the mud’ and Wall Street is going bad with a winning sector


The cloud software business is like a “knife fight in the mud,” as one famous TV personality put it, with vendors scrambling for crumbs of declining business spending and hoping Expect more to fall to the floor.

“It’s only going to get bloodier and muddier over the next nine months,” Lopez Research analyst Maribel Lopez told MarketWatch in an interview following the lines of “Succession” media mogul Logan Roy’s lines. HBO appeared.

A parade in earnings from the big cloud software names this week has indeed sent their stocks a slight recovery overall, following major declines in recent months. Those reports, however, haven’t changed the overall results for cloud software providers so far this year: Chief information officers, the executives in charge of digital infrastructure, are short of cash and delay contracts because of macroeconomic uncertainties.

“After an epic run, cloud software is going through a rough patch as companies reassess what really adds value,” Lopez told MarketWatch. “Actually, it’s like while companies wait and see the impact of an impending recession.”

In a Zscaler note on Friday, MoffettNathanson analyst Sterling Auty said that makes CIOs much more cautious in their vetting process before they commit to large multi-year contracts.

“This is a double-edged sword, as the increased deal size is coming at a time when, due to the macro, customers and prospects have a magnifying glass over new IT purchases,” says Auty. this is lengthening the sales cycle,” says Auty.

Read: Earnings show cloud and security software aren’t immune to recession

A big concern for cloud software vendors is securing a share of the SME market, as many see Microsoft Corp.
MSFT,
+0.13%

capture more market share from smaller players. On the flip side, younger companies are also trying to compete with Microsoft for bigger companies, and suppliers find those deals take longer to complete and affect growth. subscriber chief.

According to some post-earnings calls, it’s hard for cloud software providers to get deals in a cost-conscious environment. Over the past few years, native cloud companies — and legacy companies that have moved to the cloud — have introduced their version of the “platform,” or essentially an ecosystem. By adding new services or modules to the platform, companies incentivize customers to add more modules or functions to their custom platform.

Security was an exception, but now it faces the same problems

Businesses are becoming more cautious in their spending, and among cloud services, the CIO rates cybersecurity as a top priority, which is reflected in the stock’s performance. Year-to-date, ETFMG Prime Cyber ​​Security ETF
CHEAT,
-1.37%

fell 23.7% and the First Trust Nasdaq Cybersecurity ETF
CIBR,
-1.90%

down 21.9%. After a difficult November bad startiShares Expanded Software Technology Industry ETF
IGV,
-1.11%

fell 31.6% on the year, while the Global X Cloud Computing ETF
CLOUD,
-0.87%

fell 35.9%, the first cloud ETF
SKY,
-0.91%

fell 39.3% and WisdomTree Cloud Fund
WCLD,
-0.95%

fell 49.6%. Meanwhile, the S&P 500
SPX,
-0.12%

down 14.6% and the Nasdaq Composite Index
COMPUTER,
+1.87%

down 26.7%.

Cybersecurity company Zscaler Inc.
ZS,
-10.73%

However, Thursday’s results show how that sector may face more problems than expected. Guggenheim analyst John DiFucci summed up this week in a Zscaler note titled: “Nobody Beats the Macro”.

DiFucci thought Zscaler was best positioned this week in the cloud software space but admitted in the note, “We were wrong.”

“There is certainly a macro issue that has affected the Software the most, and while the Security businesses may have seemed a bit isolated at first, they no longer do,” he wrote. “The question is, how long will this weak macro backdrop last?”

The problem comes up most often in invoices – a more comprehensive sales metric widely used by software companies that combines revenue with deferred revenue for unprovided contract services .

For instance, Zscaler guided bills from $1.93 billion to $1.94 billion for the year, while analysts had forecast $1.93 billion, a sore spot for companies. Investors. On a year-to-date basis, Zscaler bills have consistently exceeded Wall Street consensus since 2018, with as low as 2.6% in 2019 and 3.7% last year, according to data compiled by Bloomberg. Factset. Over the past week, shares of Zscaler are down 7% and down 59.9% for the year.

Also read: Zscaler stock drops 10% on prudent guidance, as it takes longer to close the deal

Zscaler’s earnings report is similar to that of CrowdStrike Holdings Inc.
CRWD,
-0.06%

on Tuesday, when the cybersecurity company said Subscriber growth is slowing down due to longer buying cycles from customers. CrowdStrike shares fell 15% the next day, their second worst day. Last week, they were down 11.5% and down 39.4% on the year.

See more: CrowdStrike stock headed for worst day ever as slow registration sparks debate over business spending

Salesforce Inc.
CRM,
-1.66%

Shares took a hit after the customer relationship management software giant issued a rare forecast that fell short of expectations on Wednesday and revealed that co-CEO Bret Taylor would be leaving the company. In the last week, Salesforce’s stock has fallen 4.7% and is down 43.1% for the year.

Read it now: Salesforce co-CEO Bret Taylor leaves, shares fall after lower-than-expected forecast

Meanwhile, Snowflake Inc.
SNOW,
-2.79%

The results were greeted with mixed reviews on Wall Street. Last week, the share price was up 3.5%, while down 55.8% for the year.

Read: Snowflake stocks skip guidance misses amid debate over whether growth inspires ‘confidence’ or concern

Even Palo Alto Inc. Network.
PANW,
-3.20%
,
successfully kicked off the cybersecurity earnings season, said it needs to be more active with customers to close deals sooner. Last week, stocks ended flat and they are down just 7% for the year.

Read: Palo Alto Networks One Of The Best Software Stocks Of 2022 After Another Up Quarter

Cloud software exceptions knocked it out of the park in the past week

Shares of Business Days Inc.
DAY,
+0.89%

rose 17% on Wednesday after the human-resources cloud software company raised its outlook and launched a share buyback program. In the last week, the stock is up 14.8% and down 37.4% for the year.

Read: Business day stock up 8.5% after bullish outlook and share buyback plan

Identity security company Okta Inc.
OKTA,
-3.49%

surprise investors Profit forecast for the fourth quarter and sustaining profit over the next year, and the stock spiked 25% the next day. Okta stock is up 29.9% for the week but down 71% for the year.

Read: Okta CEO promises profits for the whole next year – ‘The problem has never been that we don’t have talented salespeople’

UiPath Company
PATH,
+12.46%

The stock edged up a bit from its steep year-to-date decline – now down 66.3% – after the “software robotics” supplier’s quarterly results and outlook beat Street estimates. Wall. Last week, shares of UiPath rose 17%.

Read: UiPath Stocks appear when results on the same Street View

For the week, HACK is up 1.8%, CIBR is up 0.7%, IGV is up 2%, CLOU is up 4.7%, SKYY is up 2.7% and WCLD is up 4.1%, while the S&P 500 is up 1. .1% and Nasdaq rose 2.1%.

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