If any word defines what has changed business life in the cloud, the word is “databases.” We like databases. No, we love databases. And as a result, we love Big Data stocks.
Companies that work with databases have risen to glory in this century. They continue to lead the market higher in 2020. As with other software stocks, those defining the leading edge of change are the most highly prized. But this much is clear. The collection, manipulation and analysis of data, from any source available, has become the primary means by which business gets done today.
There are three types of companies behind Big Data stocks:
- Those which work with structured databases, with defined fields, running a structured query language (SQL).
- Those which work with NoSQL databases. This niche, relying on open-source software, is becoming quite hot.
- And those which work with Big Data systems that analyze internet traffic and entire marketplaces.
The SQL market is the most mature of these markets. The NoSQL market is the fastest-growing. Together, they make Big Data stocks a key area of focus. Here are seven I am watching now:
- Salesforce (NYSE:CRM)
- Workday (NASDAQ:WDAY)
- MongoDB (NASDAQ:MDB)
- Cloudera (NASDAQ:CLDR)
- International Business Machines (NYSE:IBM)
- Amazon (NASDAQ:AMZN)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
Big Data Stocks: Salesforce (CRM)
The first company on my list of Big Data stocks is Salesforce. Salesforce was started by an Oracle (NYSE:ORCL) salesman who wanted to sell Oracle’s SQL database as a service. In July 2020, Salesforce passed Oracle in market capitalization.
Software as a service, delivered by the cloud, is the technology revolution of the last two decades. Salesforce has been on top of it. Oracle, with the same relational database technology, resisted it. This has made all the difference.
In the 2000s, Salesforce’s secret sauce was “multitenancy.” Every customer was using the same database to relate to their customers, and the code was shared by all. In practice it meant improvements in the application could be shared by all customers. It wasn’t open source, but it had the same effect. Customers could improve the system, even profit from it.
In its second decade, Salesforce made the cloud its secret sauce. Founder and CEO Marc Benioff negotiated among the major cloud providers so customers could host data wherever they needed it. Salesforce also built its own data centers and expanded into other database application areas.
The result, for investors, has been steady growth. Over the last five years, Salesforce stock has appreciated by an average of almost 35% each year. The key metric for Salesforce investors is operating cash flow. This has tripled over the last five years, exceeding $5 billion for the 2020 fiscal year.
Oracle remains twice as big as Salesforce by sales. But for investors, growth matters more. The potential for future growth matters even more. Staying on top of change matters more.
Salesforce has literally beaten Oracle at its own game.
Investors are always chasing the next shiny object. It’s like the Wild West. The time of the pioneers is exciting, but it’s the farmers who settle the land that produce profits.
Workday is now a farmer. It has proven the value of its niche — human resource databases in the cloud.
Much as Salesforce began with a disgruntled Oracle salesman, Workday began life with people upset over an Oracle acquisition. In this case it was PeopleSoft, an HR database software outfit Oracle bought in 2005 in a hostile takeover. Two PeopleSoft veterans then decided to launch a competitor in the cloud, and Workday was born. The company’s 2012 IPO valued it at $9.5 billion. It has more than quadrupled its value since.
Workday copied a lot of the things Salesforce did right. It has a partner ecosystem selling improvements to its system. Workday cultivated a reputation as a great place to work. It expanded its niche laterally. And it now defines what it does as a “business development manager” with financial management and human resource applications.
The problem for Workday is that success breeds an expectation for even more success. At some point every company will fall short, and expectations will ratchet downward. That’s the story of Workday’s first-quarter results. The numbers were fine. They were just short of expectations.
Analysts see slowing growth for Workday in a market niche that’s still growing, where Gartner still claims Workday is the leader. Workday’s software keeps improving, marked by a cut in the time it takes to deploy it. Workday has a new alliance with Microsoft (NASDAQ:MSFT) and a new partnership with Salesforce. Analysts expecting an economic recovery say it’s time to buy Workday.
Big Data Stocks: MongoDB (MDB)
NoSQL databases developed within an open-source ecosystem. The benefits of open-source software mainly go to the users of the software, not those who create and maintain it.
MongoDB’s way around this is Atlas, a cloud-based offering it hosts. Thanks to Atlas, company revenue grew 57% during the 2020 fiscal year, to $421 million. But building a cloud out of parts is expensive. Losses continue to grow.
Despite this, investors have been piling into MongoDB stock. Both its market share and its addressable market are growing. Investors were impressed by year-over-year growth in its April quarter. The problem was that losses grew from 61 cents per share to 94 cents.
Because MongoDB’s NoSQL database is new, exciting and growing, investors are paying. But it has never made money. What MongoDB has is the love of its customers. Customer counts are up 30% year-over-year, and the number spending over $100,000 per year is also up 30%. MongoDB has about $1 billion in cash and almost as much debt, although those are convertible notes. Managers and directors still hold 56% of the stock’s voting shares.
So what will happen when MongoDB next reports results? Investors are still expecting growth, with $126.8 million of revenue. But they aren’t expecting profit, with a 39-cent loss.
Cloudera was founded in 2008 to commercialize Hadoop, a Big Data system built for the cloud. The name Hadoop comes from the toy elephant owned by developer Doug Cutting’s daughter. Hadoop analyzes huge piles of unstructured data quickly. It’s vital to the way businesses run today.
Three years later another company, called Hortonworks, was formed around the same software. In 2018 the two agreed to merge, the deal worth $5.2 billion. Today Cloudera has a market cap of $3.4 billion.
Rather than just sell support, Cloudera is now bundling its software into what it calls an “enterprise data cloud.” This is a platform it can install at a corporate premise or in a private cloud. The idea is to take open-source tools and build proprietary insights for corporate and government clients.
Carl Icahn saw the growth of Cloudera and bought 18.4% of the company last year. Managers signed a standstill agreement with him last August, giving him two seats on the board.
So now Icahn wants out. He has management actively exploring a sale of the company, reportedly after receiving takeover interest. Investors are waiting to see what happens.
It’s not that there isn’t value in Hadoop. Selling support around open-source just isn’t a very good business. You must do something with the code, and sell that, to extract its value. I love Cloudera, but I wouldn’t put a dime into the stock.
Big Data Stocks: International Business Machines (IBM)
Two decades ago International Business Machines was a leader in the database revolution. But Microsoft invested in the cloud, while IBM did not. IBM opened for trade July 28 at a market cap of $111 billion. Microsoft is worth over $1.5 trillion.
The problem for IBM is that, in a world where software is king, it remains mainly a hardware company. Its financials obscure the point. Its old mainframe monopoly is called “Systems” and accounts for just $1.4 billion of revenue. But much of the $10.6 billion of revenue it counts as “Business Services” or “Technology Services” is serving hardware and tools that are, frankly, obsolete. Even the “Cloud & Cognitive Software” unit, which includes Red Hat, also includes transaction processing platforms.
If I were running IBM, I’d find some private equity people to take the hardware off my hands and become a pure-play cloud company. IBM does have a network of cloud data centers, and Red Hat’s OpenShift container platform is highly competitive. If those revenues were broken out from the whole, investors might pay for their growth.
The buyers would also need to take IBM’s debt. Much of that stems from buying Red Hat, which cost $34 billion.
IBM has some growth centers, but it still has too much hardware dragging it down. New CEO Arvind Krishna and president Jim Whitehurst, who came with Red Hat, have some high-growth businesses worth investment. They need to find cash to invest in them and create a structure that lets investors see that value. I recently decided to speculate on IBM changing because I believe in Whitehurst. June quarter results sent the stock up. Can it keep that going?
How could you have a list of Big Data stocks without including Amazon? Databases have made Amazon the pearl of great price in today’s pandemic market.
What you need to understand about Amazon is that it’s not a database company. It’s not a merchant, it’s not a cloud and it’s not a TV network. Amazon is an infrastructure company. It’s infrastructure for making commerce happen in an internet age.
Amazon can break bulk and deliver products to your door for less than it costs stores. Amazon Web Services, its cloud network, lets tens of millions work from home. This will change the world as it comes out of the pandemic. It will make a lot of people, and office space, redundant
So what happens next? Amazon can grow a long way without offering legitimate antitrust concerns. This doesn’t mean policymakers don’t want to hammer it. I think Amazon can make it all go away by saying the magic word. Alibaba (NYSE:BABA). Alibaba does everything Amazon does — more in fact — and it does it in Chinese. Beat down Amazon, and China’s Alibaba will triumph.
Based on standard investing metrics, Amazon is overpriced right now. How? Amazon is now worth over 5 times its sales. It’s now worth about 40 times last year’s $38.5 billion of operating cash flow. It pays no dividend, nor is it likely to in the foreseeable future.
Despite this, Amazon will be worth much more in 10 years than it is today. Amazon is essential infrastructure. It is the most important company in America, even if the third most valuable.
Big Data Stocks: Alphabet (GOOG, GOOGL)
The modern world of internet databases was defined by Alphabet.
Since the start of 2020, shares of the search giant are up 14%. This put its market cap over the $1 trillion mark for the second time. The price-earnings multiple is 30 times. Google’s cloud has transformed our lives over the last decade. That change has accelerated over the last several months.
But not everyone welcomes our new cloud leaders.
Google is viewed with increasing suspicion by policymakers.
How can we tell? Google’s $2.1 billion acquisition of Fitbit (NYSE:FIT), a fitness band company that was going nowhere, has not yet been approved. Google has promised not to use Fitbit data in marketing. Before Google announced its latest concession, Fitbit was down on the year. The European Commission was expected to decide on the deal by the end of July 2020.
Chamath Palihapitiya, a former Facebook (NASDAQ:FB) executive, is building a bear case for the stock based on Google’s status as an “incumbent” regarding the internet. Regulation, taxation and the brittleness that drove down Microsoft early in the century are all real risks, he writes.
CEO Sundar Pichai has the task of proving Palihapitiya wrong. Google has $120 billion in cash to deploy, it dominates in global mobility with Android. It’s the default search engine for Apple (NASDAQ:AAPL) as well.
If I were investing with a 10-year time horizon, I wouldn’t fear Google stock here. Everything is overpriced right now. The American cloud leaders won’t be taken down.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in IBM, AMZN, MSFT, BABA, FB and AAPL.