WP018 - Sell-side financial analysts, & enterprise software pricing
Software Defined Interviews, episode #60
Coté & Brandon Whichard,  January 2018.

What do these financial, equity analyst types do? Well, if the stock market was rational, we could probably tell you. This week, we look at one PDF reporting on cloud and try to make sense of it. Also, we discuss enterprise software pricing, THE DANCE!

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Macro

  • If I’m reading it right, these are investment bankers. They’re looking to motivate you to transact big time in the markets: buying companies, taking them private, whatever at a company scale.
  • You could also look at at just buying and selling share, but the i-bankers don’t get paid for that. They get paid like real estate investors: when there’s a transaction they take a slice.
  • Also predict the valuation and, thus, share pricing of various companies.
  • What to say about the broad categorizations?
  • They’re building up a theory (there’s a lot of growth left in cloud, particularly SaaS), and therefore you should invest in this sector (buy shares).
  • From one perspective (perhaps the most important one!) the quest here could be “I have a lot of money and want to participate in this market. This market is, roughly, companies moving from on-premises (trad’l) IT to cloud. So, what should I pick?”
  • E.g., from slide 12 "Our new 2022 forecast of $314B implies cloud revenue could triple over the next five years."
  • So if I was a pension fund, I should buy some of this high growth stuff to balance out GM, IBM, P&G, etc.
  • What’s “growth” all about in this context?
  • The apples and oranges nature of all this leave me befuddled - the “Cloud 60” (e.g., slide 11) contains AWS, Azure, Adobe, Salesforce, and doesn’t really separate the different types of things. How, and why, would you compare Adobe’s Creative Suite to Workday’s HRM to Amazon’s IaaS? And then Mule is in there too!

  • There was a story recently of Keybanc saying Azure had gains/displaced AWS. If this is the source of it, that’s a bullshit take away: Microsoft also includes Office 365, usually. And the gain is all in their estimates. Slide 17 (I think) removes Office 365, just focusing on IaaS/PaaS, and then you see that Amazon dominates revenue:

Micro

  • Very short term focuses, quarter to quarter even, e.g., “Microsoft enters 2018 with strong momentum on AWS share gains in 2017.” Counter-point: yes, but one quarter in the long game of the current Cloud Wars is nothing. The current game is replacing all of middleware and IT and migrating over enterprise IT. The “three” will come up and down - marginally - in leadership, maybe they’ll never be less than three. But, growth beyond just survival is probably a good sign for all of them.
  • “Favorite Cloud Stocks” charts - perhaps people know what all this means. There are seven different line colors (and lines) being used here, not to mention volume(?) of shares traded at the bottom as well, smoothed versus actual is fine, but what are the rest? I suppose it gives you a sense of the variability and trajectory of the share price?
  • Their lack of legends for their charts is maddening. Like slide 19 - what’s that black line? What’s the right side measuring?
  • Speaking of, slide 19: so this shows capex at these companies as an indicator of building out cloud (data centers, network, etc.?). Meaning: they’re building capacity. And also that expense should be put into valuations.
  • Slide 33 is kind of fun: a view of the shift to public cloud, plus some historics from the 90s of shifting from mainframe/PC to client-server.
  • Slide 34: the usual buzzword compliance. Blockchain to be a $4.4bn market in 2022, pretty small.
  • Slide 35: so, what do these companies actually do?