It is no coincidence that software has been one of the most successful niches of the global tech village, even amid the regulatory backlash and White House venom against Facebook and Amazon. The transition to the cloud is an industry game-changer and Microsoft CEO Satya Nadella got it right when he finally succeeded showman Steve Balmer at the helm of the empire of Redmond five years ago. The result? Mister Softy's share price has risen from 30 to 90 in the Age of Satya. There is nothing hotter than a software cloud/hybrid cloud/cloud security startup on Wall Street, as the 100 per cent-plus pop of Jay Chaudhry's Zscaler (number theory/cryptography are my latest obsessions, other than the evolutionary biology of the human brain and real estate!) up 100 per cent in a single day on its Nasdaq birth. The Microsofts, Oracles, Salesforce.coms and SAP's of the world are natural acquirers of Silicon Valley's hottest cloud startups in Silicon Valley. The repatriation of capital and higher capex/enterprise spending in the US means the pipeline of software takeovers, mergers and acquisitions will only accelerate.

My friends accuse me of often going gaga over software companies that trade at high valuations relative to the S&P 500 index and my counter-argument is that high multiples reflect 20-25 per cent recurrent revenue gain potential, something very rare outside the digital world. This is the reason Microsoft trades at 24 times earnings with its shares on fire while Oracle has been dead money at 16 times forward earnings. Pour quoi? The difference between Satya's successful and Mark Hurd's botched cloud transition strategy.

My ideal sweet spot (for risk capital, not widows, orphans or those whose brains are closed to new ideas!) has been either unicorns in the D-stage financing rounds or Nasdaq companies in the $4-$8 billion market cap stage. Take Paycom Software. Paycom has successfully disrupted the payroll processing models of Paychex and ADP. So, this puppy trades at a nosebleed 100 times earnings but the shares have doubled from 58 to 118 in the past year alone. Paycom has been the planet's preeminent software as a service payroll processor that is increasing market share, taking revenue growth in one of corporate America's highest margin outsourced markets. The next hot payroll software IPO? Ceridian Software.

Oracle's third-quarter earnings report was a disaster. The House of Larry (Elison) was literally the worst-performing stock on the S&P 500 index one day a month ago. An earnings beat was not enough for Wall Street when Oracle missed its consensus cloud growth estimates. This makes Oracle dead money till the next earnings report. The rerating case I hoped for will not happen until Oracle puts some sizzle in its cloud transition crystal ball.

Global IT spending could well rise to $4 trillion in the next 12 months, a testament to both synchronised global economic growth and the sheer transformative potential of cloud computing. Gartner even estimates enterprise software will be Big Tech's highest growth area in 2018 and revenues will rise to $391 billion in 2018. The licence, on premise model is toast and service could well be a $1 trillion revenue jackpot.

To me (and yes, I am biased. I am neurologically programmed to think conditionally and hypothetically as an investor), cloud enterprise software will be the best-performing investment theme in the next five years, even though momentum investors will be periodically Russian roulette as Wall Street braces for higher interest rate and trade/geopolitics shifts. So who are the rising starts in the Valley to leverage this theme? Marc Benioff's Salesforce.com.

Salesforce.com has been a four-bagger since 2013. This cloud software colossus has revenue guidance of $12.50 billion for next year. This means its fairy tale 25 per cent revenue growth metrics will continue, with deferred revenue growth at least 20 per cent. Would I buy Salesforce at 124 for new money? Absolutely not. Yet if M. Market has one of his periodic tantrums and CRM falls below triple-digits, I will not hesitate to buy one of history's most fascinating and profitable cloud software platforms.

Germany's enterprise application software and services firm SAP. I believe the stock market undervalues the emerging markets growth potential of S/4 Hana. After all, this firm has 900 staff in its Dubai Internet City regional office and established an innovation lab in Dubai. SAP is that rare breed. A value software megacap!

The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.

 

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