Just this morning SAP cozies up to Microsoft Azure Cloud
The hegemony of Google Cloud (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft Azure (NASDAQ:MSFT) and Amazon’s (NASDAQ:AMZN) AWS continues, and the health of these names will inform us on how the other cloud names will fare. Names like Okta inc. (OKTA), Salesforce (CRM), MongoDB (MDB), Twilio (TWLO), Adobe (ADBE), and ServiceNow (NOW), relay on the overall health of the ecosystem to justify their lofty valuations.
Last week resulted in much damage technically to share prices as I will show with charts of select names. One could point to the results of IBM (IBM) and Netflix (NFLX) that raised questions about the growth of cloud platforms and threw suspicion on the health of the services built on them. Much ink was spilled even in these pages about the middling growth of NFLX. Even the staunchest supporters would admit that NFLX didn’t shoot the lights out in subscriber adds, and IBM disappointed overall. Admittedly, while their Red Hat acquisition is growing, it still wasn’t enough to pull all of IBM up into healthy overall growth.
Traders sell first and ask questions later. Long-time readers know that I am no fan of IBM. I believe that the CEO has been negligent in management due to incompetence. I applaud the Red Hat acquisition and IBM should continue to make more such acquisitions. The danger is in the integration, will IBM seek to change Red Hat or the other way around? To ensure that IBM evolves properly, Jim Whitehurst should take the reins. What I am saying is more related to the particulars of IBM, not the overall cloud market. IBM is failing in the cloud, and they have been failing at it from day one. So they are not indicative of the overall health of the cloud ecosystem. Until they shed their current CEO and name Whitehurst to the top spot, IBM is still a sell. Eventually, the IBM cloud will (along with their phony and failing Watson AI business) fold and they will focus their energy on providing services to Google Cloud, AWS and Azure. It may hurt their pride but the train has left the station.
Separately, the most concerning was the news from Workday (NASDAQ:WDAY) via the analyst meeting last week, where WDAY was roundly panned for revealing that their HR services is not winning new clients as easily as in the past, and they will migrate to other verticals in corporate IT applications like purchasing. The looming question is, has the cloud sector lost its growth mojo, or are we seeing a separation of leaders and laggers?
Therefore, this week is crucial, we need to see continued high double-digit growth in the giant cloud players. I think SAP SE (NYSE:SAP) announcing really good earnings, especially in the cloud services, is heartening.
“For the quarter, SAP is reporting revenue of 6.79 billion euros, up 13% year over year, ahead of the Street consensus at 6.68 billion euros That includes cloud revenues of 1.79 billion euros, up 37%. Software license and support revenue was 3.84 billion euros, up 4%. Earnings on an non-IFRS basis were 1.30 euros per share, ahead of the Street at 1.19 a share. On an IFRS basis, earnings increased 28% to 1.01 euros per share”.
I bolded the 37% growth in cloud revenues. Also, as I mentioned before, SAP is moving their offering to Azure. I pulled this quote off of MSFT’s PR:
“Building on a joint commitment to simplify and modernize customers’ journeys to the cloud through project “Embrace,” SAP SE and Microsoft Corp. on Monday announced an extensive go-to-market partnership — from conceptualization to sales — to accelerate customer adoption of SAP S/4HANA and SAP Cloud Platform on Microsoft Azure.”
I think this item will be mentioned in MSFT’s forward guidance, and more importantly, gives us a reference point for the major cloud platforms. I think they will show healthy growth.
Relating SAP results back to WDAY is that an old-line software giant like an SAP is fighting back against WDAY and winning or at least holding its own. Similar to my “The Empire Strikes Back” theme of my last article. This time it’s not in the media space or retail space, but the cloud space. Perhaps this is a sustainable trend, where you have an innovator that comes in and disrupts, they have success for years until some of the “old dogs” learn new tricks.
This is just one data item, we need more and we will get more. Also, WDAY is not toast, they will continue to win HR deals, big contracts for cloud companies always seem to come in lumps, and they will find new areas to exploit. They have great execution and happy customers who will be open to new services. Still, this might be a signal for a watershed moment where there is more than one champion in a vertical, and the addressable market will have to be lowered in your valuation scheme. Oracle (NYSE:ORCL) and SAP are not IBM, they have proven that they can adapt to the cloud, and if not thrive then at least hold their own.
In any case, a lot of damage was done technically to a lot of names that I like in the cloud space. Let’s look at a few charts.
WDAY looks like it has more downside. I suspect that a lot of more of the previously mentioned cloud names will have similar further downside on their charts with pronounced “head and shoulders” formations. That said, a lot of froth has been knocked down in these names, and if I am right that Azure and AWS are going to be just fine, then these names should turn around. The above chart looks like there is 10 to 20 points to the downside. I think you can wait on getting in right way for WDAY. Let’s look at the others.
OKTA is very similar to WDAY. There is some pronounced downside risk now.
CRM looks scary with a strong downside channel, but it looks like it is coming into support. Okta looks as bad as WDAY, and as far as I know, they have been doing well. OKTA needs a few days to level off and find support before I’d get back in. CRM might be a good bet right now. Of course, buying into the teeth of earnings is risky: Wait until MSFT and AMZN report this week and buy small. If you are already in the cloud names, definitely wait until after to add more.
This is a really interesting chart of MDB. The arrow on the right signifies a huge “gap-up”. Technicians often talk about filling gaps. That is what seems to be going on here. Sellers are “filling the gap”, there is symmetry in technical analysis and often you will also see a chart where buyers fill a “down-gap”. So if there is no countervailing news to the upside, it looks like MDB has further to fall to somewhere in the low $100s.
To my eye, ADBE is coming into some very strong support. There is probably 8 to 10 points of downside. I would wait a bit, again MSFT and AMZN earnings are only in a few days. Let’s wait and see.
Boeing (BA) is a buy. Haven’t we already heard more dire information than one agency had email material and another didn’t? I said on Friday that Miulenberg is going to get fired. I stand by that, maybe not this minute, but the handwriting is on the wall. With that news, BA will pop strongly. If you started accumulating Friday as BA fell to $250, buy some more today. My standard is to buy in 1/5th increments, so buy another 1/5th today.
In three months, BA will be back to moving close to $390 again, and we can do this all over again. You may decide to use options to express this trade. I would look for a December expiration and a slightly out of the money strike to do so. Look at the chart to see how many times BA recovered into the +$380s.
We have done this several times before. I marked out the buy points at $350 and the sell points at around +$380
Each time, I recommended buying starting at $350. Back in August, BA fell hard into the $320s and yet it rose back to nearly $390. BA will get over this trying episode in its history. BA is a buy for the speculator, I would not be so bold as to say that BA is a fast money trade. It might be. But the risk-reward to me is very much to the upside. If you are an investor in BA, that means you are an owner, are you going to sell your ownership of Boeing because of some email? Boeing has a storied history of reliable planes, and it has a glorious future. It reports on the 23rd, and it now has a decent dividend at 2.2%. It will be very telling if BA underperforms going into earnings and starts to move up from there.
Pinterest (PINS) gets upgraded with a new price target upped from $30 to $35. RBC cites better usage trends.
My Take: I like PINS. It is now past the IPO lockup. I don’t think it’s a coincidence that PINS was upgraded this week after the lockup. I feel very comfortable saying that PINS is a buy as well. I have PINS in my “new eRetailers” list. I believe that PINS will evolve into a unique eCommerce play. Also as an aside, the existence of PINS belies the notion that Facebook (NASDAQ:FB) is a monopoly social network and no other social network service company can exist under its onslaught. This is patent bunk kited by politicians and talking heads that want to gin up hysteria so they can get juicy speaking fees.
DocuSign (DOCU): Buy rating D.A. Davidson raised the price target to $79 from $63.
My Take: DOCU is a BUY
Beyond Meat (BYND): Sanford C. Bernstein lowered the PT from $172 to $130.
My Take: Do I have to say it? BYND is a sell and the price will be $60 before too long.
This is a great quote from Barron’s on Datadog (DDOG) by a JPMorgan analyst:
“Over the past 10 years, we have seen an increasing amount of enterprise computing workloads shifting to the public cloud. Now, we are seeing enterprises putting more mission-critical applications in the cloud. That requires technology to monitor for problems, and Datadog has developed the market-leading solution for this. We see Datadog as the best-positioned to capture not only the biggest share of infrastructure monitoring but also the opportunity from companies [seeking] a single monitoring vendor. This year, we expect Datadog to generate $328.7 million in revenue, representing a growth rate of 65.9%. That alone puts Datadog in rarefied company… with peers like Zoom and CrowdStrike (CRWD), underpinning our Overweight rating. Our December 2020 price target of $45 is based on our 10-year discounted cash-flow analysis”
There is another competitor in this space that I have been enthusiastic about for a long time, New Relic (NEWR). NEWR has fallen hard since the IPO of DDOG. I have been looking around the tech media space and they seem to be evenly matched, where NEWR might have more developer resources. However, the difference so far is not that much.
What I do want to reiterate is that Cisco (CSCO) tried to buy DDOG for $7 billion. DDOG has fallen 25% and is not just above $9 billion. I think we are getting close to a very nice valuation for a company that is growing 65.9 percent. If it exhibits that growth again in the next earnings report, I think it is safe to value DDOG at least at $9 billion just on the growth.
So let’s keep watching DDOG and hope it falls another 10% to give us an opportunity for alpha. That time might be after the IPO lock-up which is 6 months from the IPO date. If you are a speculator willing to hold DDOG for a year, then your target is this $45 PT. DDOG is now $32, and still going lower, but such patient money could begin to accumulate. This is a very hot area, as large enterprises and even startups put their most important functionality on the cloud, the ability to monitor the performance is mission-critical. I still think that NEWR is interesting as well. Study both before you pull the trigger.
CNBC confirms my monitoring of Tiger insider buying of Sunrun (NASDAQ:RUN). This quote encapsulates my observations and adds a bit more context:
“Tiger Global Management now owns 25% of San Francisco-based Sunrun, according to regulatory filings. Shares of Sunrun, the nation’s largest residential solar company, are up more than 50% this year.
“RUN offers the best growth prospects … and has distinguished itself with significant cost discipline and sagacious capital execution,” KeyBanc analyst Sophie Karp wrote when initiating coverage on the stock with an overweight rating.”
I like to look for confirmation from larger media outlets, especially when I scoop them by weeks. As I said about 2 weeks ago, if you are looking for an “out of the box” way to play the home building market, especially in California, RUN might be a great venue. Just as a reminder, California now has regulations requiring every new home to have solar panels.
Keurig Dr Pepper (KDP): Mary Beth Denooyer (Insider) $165K. Ronald O. Perelman (Major Shareholder) $1.96 million.
My Take: Buying in KDP is interesting as it is paired with a major activist type investor and a corporate insider. Let’s keep an eye on this one.
Stitch Fix (SFIX) J. William Gurley (Director) $3.5 million.
My Take: Bill Gurley is a legend among VC investors. I think this is VERY interesting. I think SFIX is a rising star and is another member of my “new eRetailers” list. This is a disruptive name that has a lot of potential for alpha
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I still have some low cost call options on MSFT to express my bullish stance.