With a record-low number of IPOs for tech unicorns this year – just 17, the lowest since 2009 – the stock market is hinting to investors that “the next big thing” could be the same old thing.
Prices of traditional tech stocks such as IBM and Oracle have risen in 2016, turning around a one-year downward trend.
The key to their success is cloud computing, a sector that continues to deliver returns on investment: in the last year, the First Trust ISE Cloud Computing ETF (SKYY), an index that measures cloud-computing stock trading, has outperformed both the NASDAQ and the Standard & Poor’s 500. with an increase of 16%, double both of the other two indexes.
In September 2015 Oracle spiraled down to $35 a share on the NASDAQ, while IBM’s equities were trading at $139 on the NYSE. But IBM stock has risen +15.43% for the year to date, reaching $158, outperforming both Microsoft and Intel. Analysts upgraded IBM stock from value to growth.
Following a similar trend, Oracle’s stocks rose from a low of $33 in January to a $39.28 close on Friday, an 18% increase. Oracle’s bullish surge was slowed by difficulties in implementing its new cloud-transition strategy: the $9.3 billion offer to acquire NetSuite Inc. is still uncertain.
IBM’s stock fluctuation may indicate a shift in the company’s long-term strategy: it restructured its investing mainly on its five Strategic Imperatives, led by cloud computing and Cognitive Solution, a k a artificial intelligence.
Despite a year-to-year loss in revenues of 3%, IBM’s 2015 annual report shows that revenue from analytics and cloud rose by 26%, generating $29 billion — 35% of IBM’s total revenue. The Strategic Imperative division accounted for 38% of the company’s total revenue.
Cloud computing in particular is at the core of IBM‘s new strategy.
“Our cloud-as-a-Service revenue was up 50%, and we exited the quarter with an annual run rate of $6.7 billion in our cloud-as-a-Service businesses,” said Patricia Murphy, vice president for investor relations, in the last earnings presentation in July. “That’s up from $5.4 billion last quarter.”
As Big Blue expands into cloud investments – integrating its business management product into the cloud – pure cloud companies such as Salesforce have seen the value of their stock plummeting: after the company’s bid to acquire LinkedIn filed, its stock fell from $76 in January to $71 at market closing on Sept. 30. As uncertainty about a possible acquisition of Twitter grows, Salesforce’s stock risks replaying its plunge last February, when it was traded at $54.
But the conclusive evidence of bullishness in the cloud-computing sector comes from Amazon. Amazon Web Services, the company’s cloud division, is one of its fastest-growing segments. As Amazon’s the cloud services net sales increased by 63.9% year-over-year in the first quarter of 2016, the company’s stock skyrocketed from $537 in October last year to $830 at market closing on Sept. 30.
“You can see us continue to invest in things like new application services, higher up the stack, additional technologies that will make integrating with AWS seamless for those companies that have a hybrid IT environment and then continuing to add functionality for data analytics, mobile, Internet of things, machine learning offerings,” said Brian T. Olsavsky, senior vice president and chief financial officer at Amazon.
The consensus on bullish cloud computing stretches further, especially because the sector represents a gateway to artificial intelligence and machine learning. The ability to log activities performed in the cloud offers an invaluable amount of data to “teach” algorithms how to carry out automated tasks.
More proof, if any were necessary, comes from the latest report by Gartner Research, a consulting firm that provides IT-related market analysis. The report estimates that the worldwide public cloud services market will grow this year to $209 billion, from $175 billion in 2015. “The dramatic rise of smart machines and autonomous devices is driving radical shifts in business practices and individual behaviors,” the report’s summary says.
Investors should expect no clouds on the cloud stocks.