Across the tech industry, many older companies like IBM and Microsoft are heavily expanding their cloud businesses to generate fresh sales growth. However, these transitional players are weighed down by their slower-growth businesses, and won't likely deliver massive returns over the long run.
Instead, growth-oriented investors should focus on "pure play" cloud companies, which generate all their revenue from cloud services without the legacy baggage. Let's examine three stocks that fit that description -- Salesforce (NYSE:CRM), Veeva Systems (NYSE:VEEV), and Twilio (NYSE:TWLO) -- and why they might make you rich over the next few years.
Salesforce is the largest cloud-based CRM (customer relationship management) platform vendor in the world. Gartner claims that Salesforce controlled 19.7% of the CRM market last year, compared to 10.2% for SAP, 7.8% for Oracle, and 4.3% for Microsoft. Those three rivals all lost market share annually as Salesforce's share grew 1.5 percentage points.
Salesforce's core CRM services include the Sales Cloud, Service Cloud, App Cloud, and Marketing Cloud. All four units posted robust double-digit sales growth last quarter and boosted the company's total revenue by 27% to $1.9 billion. Analysts currently expect Salesforce's revenue to rise 25% for the full year, compared to 24% growth in fiscal 2016.
In the past, Salesforce struggled to maintain GAAP profitability due to high stock-based compensation and marketing expenses. But last quarter, its GAAP net income rose nearly 850% to $38.8 million, or $0.06 per share, as revenue growth comfortably outpaced its operating expenses. Salesforce expects that streak to continue with GAAP earnings between $0.20-$0.22 for the year, compared to a GAAP loss of $0.07 per share last year.
One of Salesforce's key partners in the healthcare industry is Veeva, which uses its SFA (Sales Force Automation) tools as the foundation of its own CRM platform for drug companies. Veeva's core products include the Veeva Vault, which helps it track prescribing habits, clinical trial progress, regulatory filings, and new industry regulations; and Veeva Commercial Cloud, which helps customers manage customer relationships.
Veeva's customer base includes major drugmakers like Pfizer, Merck, and Novartis, which reinforces its "best in breed" position and makes it nearly impossible for competitors to enter its CRM niche. That's why its core subscription services revenue rose 39% annually last quarter and boosted its total revenue by 33% to $120 million. Analysts expect Veeva's revenue to rise 27% for the full year, compared to 31% growth last year.
Like Salesforce, Veeva is profitable on a GAAP basis. But last quarter, its GAAP net income fell 4% annually to $12.5 million, or $0.09 per share, due to higher stock-based compensation and amortization expenses. Non-GAAP earnings, which exclude those costs, rose 23% to $17.1 million. Veeva doesn't offer forward guidance for its GAAP-adjusted earnings, but it expects non-GAAP net income of $0.55-$0.57 per share for the year, compared to $0.51 per share in 2016.
Twilio went public on June 23 and has already risen about 180% above its IPO price of $15. The company's cloud platform helps Facebook's (NASDAQ:FB) WhatsApp and Uber interact with customers by connecting phone numbers to mobile apps. In WhatsApp, it enables users to add contacts with their phone numbers; in Uber, it lets passengers call or text drivers from inside the app.
Twilio benefits from the rise of "no stack" start-ups, which create a core service while outsourcing other features -- like mapping, payments, or phone number searches -- to "best in breed" players like Google, PayPal, and Twilio. In the past, "full stack" start-ups would develop all those features from scratch, which was time consuming, expensive, and buggy. Twilio generates revenue by charging developers per-minute rates for calls, per-message rates for text messages, and monthly rates for dedicated Twilio phone numbers.
That business model has delivered explosive returns. Revenue rose 70% year-over-year to $64.5 million last quarter, and active customer accounts grew 45% to 30,780. Twilio expects its revenue to rise 52% to 54% in 2016, compared to 88% growth in 2015. But unlike Salesforce and Veeva, Twilio isn't profitable on a GAAP or non-GAAP basis, and its rising expenses indicate that it will likely stay in the red for the foreseeable future.
But mind the valuations...
Salesforce, Veeva, and Twilio are all high-growth companies, but investors should keep an eye on their valuations. Salesforce has a P/S of 8 (which is already higher than the industry average for application software makers), but Veeva and Twilio respectively trade at 12 and 18 times trailing sales.
In other words, all three stocks could plummet if sales growth falls short of expectations. Nonetheless, investors who want higher risk plays with higher potential rewards should take a closer look at these three pure play cloud stocks.