Cloud Services

Cloud computing is what you get when software applications and data are stored and run on the Internet. It allows for on-demand access to computing resources like apps and data storage. Public cloud is shared across organizations, while private cloud is dedicated to a single organization. Cloud service providers (CSPs) such as Amazon Web Services and Microsoft Azure host these resources. Customers rent or pay a subscription to use the infrastructure and tools provided by these and other companies. Cloud subsectors include infrastructure as a service (IaaS), platform as a service (PaaS), cloud management and security, and software as a service (SaaS). We cover SaaS on our software and SaaS webpage.

Industry Trends

  • Remote collaboration tools will continue to grow in importance and become more customized and integrated.
  • Artificial intelligence (AI), including chatbots, location services, and digital assistants, will be more widely used.
  • The migration of healthcare to the cloud will continue, accelerating the adoption of telehealth services.
  • Edge computing will become part of the computing landscape, keeping data closer to the devices that need them, such as self-driving vehicles, manufacturing control, facial recognition, smart doorbells and light switches, and temperature control systems.
  • Serverless computing, a fairly recent development in which CSPs are responsible for allocating resources, will grow in popularity over the next few years.
  • Desktop as a service (DaaS), also called virtual cloud desktops, will become more common as companies take advantage of the predictable costs, convenience, and security afforded by cloud-based deployment of desktops.

 

Market and Valuation Trends

  • Cloud company valuations faltered early in the pandemic but recovered quickly and have thrived in the past year.
  • The ability to conduct business digitally has become even more important and companies that provide cloud products and services have become a major part of the economy.
  • Scalability, growth, and recurring revenue drive cloud service company valuations.
  • Higher lifetime value of customers and minimal customer churn also help drive up valuations.
  • Cloud companies are attractive targets for strategic and private equity (financial) buyers. Healthy competition for deals, coupled with plentiful cash, is driving up valuations.
  • Cyber security will continue to be one of the hottest sectors.

 

What Buyers Want

  • Scalability – Bigger is better. Provable growth, large addressable markets, and economies of scale help drive higher valuation multiples.
  • Recurring revenue – Predictable cash flow reduces risk and provides a foundation for growth.
  • Sticky customers – Buyers much prefer companies with low customer turnover, while avoiding customer/revenue concentration (a high percentage of revenue from a small percentage of customers).
  • Accurate financial records – Accurate record keeping and revenue recognition, and GAAP-based accrual accounting are signs of mature businesses.
  • Differentiation – businesses that are differentiated in the market and have strong brands are more desirable.
  • Transferable value – companies with intellectual property and management teams that are not dependent on the founder or owner are more attractive and achieve higher valuations.