What's 🔥 in Enterprise IT/VC #313

Stormy 🌧️ ahead but keep the faith - the halo effect from public cloud spend is real

Oct 29, 2022

As I prepare for our first in-person AGM or annual investor meeting in Miami 🌴 this week, I keep asking myself how will I find the right balance between the shitty reality of today and optimism for the future. Clearly it was a rough week for tech and our story would have been much easier if the Big 3 cloud vendors showed accelerating growth. However, the stock market is a real time voting machine which trades on future expectations of earnings and this week the big 3 cloud vendors whiffed on expectations. Here are the summarized numbers from Jamin Ball.

Jamin Ball @jaminball

Cloud Giants Update: AWS (Amazon): $82B run rate growing 28% YoY (last Q grew 33%) Azure (Microsoft): In the $50's billion run rate (estimate) growing 42% YoY (last Q grew 46%) Google Cloud (includes GSuite): $27B run rate growing 38% YoY (last Q grew 36%, neither are cc)

And headlines like this from Barron’s abound “Shades of the Dot-Com Bust: The Dow Walloped the Nasdaq This Week” - not a great setting to point to the future when folks compare this to the dot-com bubble and bust.

So why am I still bullish? While I can’t predict EV/NTM multiples for the Top 5 in the future (it’s still at over 15x down from 80x), we have to remember that the underlying fundamentals about where revenue will come from, cloud spend, are still ginormous and not falling off of a cliff. Here’s a great slide from Hashicorp’s investor day a few weeks ago that beautifully encapsulates this. Notice the bottom right corner - IDC estimates 750 million new cloud native apps will be built by 2025 representing 4x growth 😲. The shift to cloud drags everything else with it, and while growth is slowing, the numbers are massive and the halo effect of spending on developer tools, developer productivity, infra, and security is real.

Speaking of this halo effect - here are some numbers on Github from Microsoft’s earnings transcript - $1B ARR in 4 years - that’s a lot of money spent on dev tooling! That $7.5B purchase price of Github 4 years ago looks like a steal now.

All of, Azure ML revenue has increased more than 100% for four quarters in a row. Now on to developers. We have the most complete platform for developers to build cloud-native applications. Four years since our acquisition, GitHub is now at $1 billion in annual recurring revenue.
And GitHub's developer-first ethos has never been stronger. More than 90 million people now use the service to build software for any cloud on any platform up three times. GitHub advanced security is helping organizations improve their security posture by bringing features directly into the developer's workflow. Toyota North America chose the offering this quarter to help its developers build and secure many of its most critical applications.

This halo effect from cloud spend also impacts cybersecurity. Gartner recently forecasted security spending to grow 11.3% to $188.3B YoY. Those are once again large and astonishing numbers and within that, we have even faster pockets of growth. Remember my comment above on 750M new cloud native apps? Well guess what, you have to secure those - app security is expected to grow 25%, cloud security slightly faster at 27%, and data privacy and security at 17% and 14%.

It’s going to be ugly for valuations in the tech sector the next 12 months as public investor rotate into other sectors, but rest assured, the true builders will keep building and will be ready when we recover. Growth at all costs is over, balanced growth is in - cut your burn, build revenue and expense models that make sense, and keep the faith 🤲🏼!

As always, 🙏🏼 for reading and please share with your friends and colleagues.