Reasons to be Optimistic about Cloud Stocks in 2022


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Cloud stocks have been on an absolute tear over the past year, with many of the biggest names in the industry hitting all-time highs while simultaneously posting record revenues and profits. It hasn’t been easy though, as there have been several steep pullbacks along the way which have wiped out months of gains. However, this latest recovery gives investors optimism that we’re finally on the road to recovery and sustainable growth in cloud stocks, especially since the 2022 outlook is looking stronger than ever before. Here are three reasons to be optimistic about cloud stocks in 2022…

Early in the year, investors sold down cloud stocks due to concerns over inflation and increasing interest rates.
After impressive quarter-to-quarter results and upbeat full-year expectations, they are now beginning to gain pace.
According to Elliott Robinson, a partner at Bessemer Venture Partners, “We haven’t seen the fundamentals of that basket of firms actually fall off a cliff.”

Investors who were hoping to purchase cloud stocks at deep discounts may have lost their chance.

When examining the cloud software industry, which fell at the start of the year, some stocks have gained by 50% from their lows. The sector-wide WisdomTree Cloud Computing Fund has gained by 26% over the past three months, outpacing the S&P 500 by less than 9%. The cloud index is still underperforming the market year-over-year by a wide margin.

For cloud firms, which rose during the pandemic when borrowing rates were low and investors were willing to pay high premiums for growth, the macro facts continue to be adverse. Earnings, dividends, and products that consumers need in both good and bad economic times are more expensive at the moment since the Fed is in the midst of a cycle of rate rises and inflation is almost at a 40-year high.

However, despite the fact that cloud stock values were plummeting in the first half of 2022, the firms that were responsible for those stock prices mostly kept on trucking along, demonstrating that there was still a healthy market for their goods and services.

These equities may once again thrive when market confidence returns since the company may have undercorrected and are in good position. Some investors have gambled on it during the past several months in an effort to take advantage of what they believe to be easy money.

Elliott Robinson, a partner at Bessemer Venture Partners and co-founder of the company’s growth-investment group, stated that “some of this stuff is coming back a little bit.” “We haven’t actually observed the fundamentals of that group of companies falling down a cliff.”

Image Source- GitLab

Take GitLab, for instance, whose capabilities assist software engineers in managing source code. The stock price of the corporation fell 75% between November and April. It everything changed in June.

Despite falling short of experts’ expectations, GitLab reported a 75% increase in sales over the previous year. The stock was raised by Goldman Sachs from the equivalent of hold to buy.

At the time, Goldman Sachs analysts stated in a study that “in the near-term, GTLB is expected to experience a more consistent demand backdrop (compared to discretionary and complicated IT solutions) since it delivers major cost reductions and operational benefits.”

The stock in GitLab has doubled in value over the last three months, outperforming all other equities in the WisdomTree portfolio. Confluent, a maker of data-processing software, has had the second-largest increase, rising 81% since mid-May. Confluent predicted growth of at least 46% for the year and recorded a revenue gain of 58% for the second quarter on August 3.

On the company’s earnings call, CEO Jay Kreps explained to investors how Confluent’s technology “sits in the operational stack powering apps that directly service important business activities and real-time customer experiences.” Given its importance, it cannot be turned off without seriously impairing corporate operations.

Following the release of Confluent’s report, Atlassian outperformed expectations with a 36% increase, raising the stock of the collaboration software provider, which has now increased by 67% in three months.

This week, the good news persisted. As of Thursday, Toast, a provider of restaurant software, had revenue that was 58% more than expected for the quarter and had raised its 2022 outlook. Due to this, the stock increased by over 8% on Friday and by 55% since May 12.

The economy’s data is giving the cloud industry an additional boost since it seems less dangerous than it did one month ago. According to a study released on Wednesday by the U.S. Bureau of Labor Statistics, consumer prices rose more slowly in July than they did in June. Stocks increased on the belief that the Fed may limit rate increases.

But not everyone has experienced the cloud ascension. Particularly poorly performing businesses have been those with substantial customer exposure.

Image Source- Yahoo Finance

Shopify has increased by less than 30% over the last three months, yet it is still 77% behind its peak. Online merchants utilise the company’s software to assist manage payments, inventory, and logistics. Shopify disappointed investors in late July and warned that rising inflation and interest rates will hurt the company’s performance in the second half of the year.

“We now think 2022 will end up being different, more of a transition year,” the business said in a statement on its financial performance. “Ecommerce has essentially reset to the pre-Covid trend line and is now pushed by sustained high inflation.”

In his weekly cloud email on Friday, Altimeter Capital investor Jamin Ball said that aggressive purchasers of software stocks could be anticipating future developments. He anticipates rising interest rates, continued high inflation, and the start of a U.S. recession.

Ball added, “I believe the market is being too optimistic based on the evidence we currently have. “I don’t believe we are now in a recession, but I do believe one is on the horizon, most likely in 2023.”


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