Cloud Services

Cloud computing is the delivery of computing services over the Internet. There are many services associated with cloud computing that cover a wide range of functions, from the basics of storage, processing, software applications and networking through artificial intelligence and Natural Language Processing (NLP). There is overlap between the cloud and SaaS (software as a service) markets because SaaS is often deployed via the cloud. We describe SaaS in a separate section about software and SaaS.

Industry Trends

  • The global cloud computing market is forecast to go over $650 billion by 2025, with 80% of organizations having migrated to the cloud.
  • Cloud initiatives are expected to account for 70% of all tech spending in 2020.
  • Infrastructure as a Service (IaaS) is expected to reach $72.4 billion worldwide in 2020, led by Amazon Web Services, Microsoft Azure, and Google Cloud Platform.
  • Serverless computing, in which the cloud provider runs the server and dynamically manages the allocation of machine resources, is the fastest growing extended cloud service.
  • As many as 84% of enterprises run on a multi-cloud strategy, meaning that companies will not be dependent on a single vendor.
  • Newer technologies and services will accelerate the growth of the cloud services market, including the adoption of Internet of Things (IoT), edge computing, 5G, use of real time analytics enabled by Artificial Intelligence (AI) and Machine Learning (ML).

 

Market and Valuation Trends

  • Recurring revenue and fast growth drive cloud service company valuations.
  • Higher lifetime value of customers and minimal customer churn also help drive up valuations.
  • Cloud service companies are active in the M&A markets. In addition to the huge cloud infrastructure companies (Amazon, Microsoft, and Google) there are many small and medium sized players that provide cloud services such as cloud management, cyber security, and virtualization that are actively acquiring.
  • Cyber security, telework, and machine learning are the hottest sectors and are expected to get even hotter after the pandemic crisis subsides.
  • Recent valuation trends – Prior to the pandemic, valuations were high, ranging as high as 3 to 6 times revenue. In order to achieve such a lofty valuation, a company must prove that it can scale to at least $2 million recurring revenue (preferably $5 million). Also, it must not be dependent on the founders. We are waiting to see what happens to valuations as the pandemic recedes.

 

What Buyers Want

  • Recurring revenue – Cash flow provides a strong foundation for growth.
  • Scale – Bigger is better. Economies of scale and higher valuation multiples help larger players.
  • Reliable customers – Good customers who have a good payment history, while avoiding too much revenue concentration with a small group of customers.
  • GAAP Financials – Recurring revenue needs to be accrued appropriately. Cash-basis accounting can lead to big problems, particularly when lump payments are received for longer subscription periods.