The year of the cloud has been one of the most successful themes for the Mad Hedge Technology Letter since inception and rightly so.
The heavy hitters are knocking it out of the park with the top gangbuster firms facing no impediment to success.
As these firms crack on, it seems there is not a day that passes by where Amazon (AMZN) or Microsoft (MSFT) do not close up 1% for the day.
If you are feeling nervous and believe the top cloud plays are getting too frothy for your taste, even though they are not, it is time to look at alternative parts of the cloud ecosphere that could tickle your fancy.
The second-tier cloud companies focusing on a particular niche of the market is the perfect place to identify companies that are growing at higher rates than the top cloud companies in terms of revenue expansion.
Amazon, because of its sheer size, will find it harder to double its revenue in the same amount of time as cloud companies with annual revenue of just a few hundred million dollars.
Zscaler (ZS) is a cloud security company that I advised readers to buy on April,16, at $29 and after a blowout quarterly report the stock touched the $42 handle intraday.
This company is a solid buy, especially in light of the General Data Protection Regulation (GDPR) and a newfound, broad-based emphasis on Internet security that will usher in a new injection of cloud security spending.
Zscaler CEO Jay Chaudhry delivered a glorious quarterly performance and the only direction this company is going is up.
All told, Zscaler processes in excess of 45 billion Internet requests per day during peak periods.
It detects and blocks more than 100 million daily threats while performing more than 120,000 unique daily security updates.
The end result is far superior security than traditional outlets. That's the whole point.
The cloud security company was able to inspire business to a 49% YOY pace of growth and calculated billings were up 73% YOY to $54.7 million.
The quarter's success didn't stop there with operating margins gaining 9% YOY helping Zscaler go cash free positive for the quarter.
The type of security products it offers is part of an annual $17.7 billion market and rapidly expanding.
Firms are incentivized to adopt these products because reduced cost on bandwidth and lower network equipment costs benefit the bottom line.
A mobile dominant world is fast approaching, and Zscaler has positioned itself perfectly to take advantage of the new pipeline of business coming its way.
The slew of new signed contracts reinforces this trend.
The most prominent deals were with a Fortune 500 medical equipment company that purchased a bundle including a Cloud Firewall, Sandbox and Data Loss Prevention for 40,000 users.
It followed that up with a deal with a European bank that added the business bundle with SSL inspection and data loss prevention (DLP) for more than 70,000 users driven by the business moving to Office 365.
Zscaler kept going strong with another Fortune 500 tech company joining its lineup, integrating the transformation bundle for 20,000 employees and contractors just six months ago,
They were thrilled with the products, leading them to buy an additional 25,000 seats and now have all 45,000 employees served by Zscaler.
A global 500 IT services and products company in Asia went for the entry level professional bundle covering10,000 users in Q2.
It expanded the next quarter with the same bundle for more than 130,000 users domestically.
Forecasted revenue is expected to be in the range of $184 million to $185 million, substantially larger than the $126 million of revenue in 2017.
Once annual revenues start eclipsing the several billion-dollar mark, growth becomes tougher to grind out.
Zscaler is headed by an old hand and understands the market in detail.
The firm will be in a growth sweet spot for the foreseeable future. Subscribers who do not mind taking on the added risk could expect these investments to pay off many times over.
Another niche cloud company Zuora (ZUO) is performing briskly.
I recommended this stock the same day as Zscaler when it was trading at $20.50. The stock is up big, rocketing to $28.50 at the time of this writing.
Zuora is a company focused on software that helps companies manage their subscriptions business, which has been all the rage for tech companies.
The software as a service (SaaS) model has become the de-facto standard to bill for tech services, and Zuora helps automate and execute.
First quarter revenue surged 60% to $51.7 million.
Zuora's retention rate of 110% increased to 112%, demonstrating that existing customers buy premium add-ons and stick around in its ecosystem.
Zuora increased the numbers of clients with an active contract value greater than $100,000 by 6% to 441, resulting in a net add of 26.
Zscaler and Zuora are around the same size and could experience similar bullish price trajectories in the stock going forward.
DocuSign (DOCU), a digital signature software company, is another niche player whose services have been valuable in the business environment.
Instead of scrawling out your name with a quill and ink, clicking to sign makes the process faster than ever.
The stickiness of its services led Forbes to anoint DocuSign as the fourth best cloud company on the Forbes Cloud 100 list in 2017.
Last year saw DocuSign blow past the half a billion-number bringing in revenue of $518 million, up 36% YOY.
The lion's share of its business comes from its subscription business carving out $484 million in 2017, passing the $348 million in 2016.
DocuSign set an IPO price range between $24 to $26 in April 2018, and the stock has more than doubled to $58 today.
Do not fight against the cloud; embrace it like your lovable pet dog. There is no reason to short these stocks because chances are likely you will get badly burned on these ultimate buy on the dip stocks.
However, DocuSign has seldom even dipped, even in the face of a trade war, crushing dip buyers' dreams.
It has gone up in a straight line.
Only once since its late April IPO has there been a pullback of more than $1.50, and that happened in mid-May when the stock went from $45.50 to $43.
Remember, the trend is your friend.
Zscaler's 37% bump to its share prices after the earnings beat is why you want to get into this stock.
The moves up are legendary.
Zuora's earnings beat earned them a not-too-shabby 20% one-day return as well.
No matter how well Amazon does, there is no 37% up move in one day unless it finds the cure for cancer in a single pill form.
As Amazon and Microsoft grow stronger, so does the appetite for these niche cloud services.
The tide will lift all boats and choosing either a dinghy or a luxury yacht will stand you in good stead.
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Quote of the Day
"I don't care about revenues," - said Cofounder and Executive Chairman of Alibaba Jack Ma.
