Tech valuations fall, but enterprise software stocks are cushioned by the cloud

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Technology valuations were distorted by rising interest rates, high inflation and economic uncertainty, but not so much in enterprise software. Demand holds steady as businesses continue to reorient around cloud computing and data, CIOs say.

Information technology companies including International Business Machines Corp., Hewlett Packard Enterprise Co.

and Oracle Corp.

showed resilience amid a rout in tech stocks. All three have so far outperformed market benchmarks that have fallen year-to-date.

As of Wednesday, the tech-heavy Nasdaq composite index had fallen more than 23% since January. Over the same period, the stock price of IBM, which sells cloud-based enterprise software and services, rose 4.3%.

Prices at HPE, an enterprise software company spun off from computer maker Hewlett Packard, remained roughly flat. On Wednesday, the company reported revenue of $6.7 billion for the quarter ended April 30, up 1.5% year-over-year as online software orders took a hit. almost doubled compared to the previous year.

Sell-offs continued to hit major U.S. stock indices, with the S&P 500 entering bearish territory on Friday for the first time in more than two years. Caitlin McCabe of the WSJ examines some of the main causes of market volatility. Photo: John Minchillo/Associated Press

Shares of software company Oracle have not fared as well, falling about 17% this year through Wednesday. But its prices have consistently stayed above rolling tech market benchmarks. In March, the company reported double-digit cloud revenue growth for the quarter ended February.

“Enterprise computing is seen as more secure and less fickle than consumer technology by investors,” said Karena Man, a consultant at management consultancy Egon Zehnder. When the dotcom bubble burst in the early 2000s, mainstream digital valuations were wiped out. “But enterprise technology was always where investors put their money,” she said.

The demand for enterprise technology was evident last week when semiconductor giant Broadcom Inc.

said it would acquire VMware Inc.

in a deal valued at $61 billion. VMware is known for its virtualization technology, in which software is used to replace more expensive physical equipment.

“There is more demand for technology than there has ever been before,” said Jim Swanson, executive vice president and chief corporate information officer at healthcare giant Johnson & Johnson. and consumer goods based in New Brunswick, New Jersey..

The Covid-19 pandemic has laid bare the importance of capabilities such as cloud-based enterprise tools to adapt to sudden market changes and weather uncertain times, he said.

In the same way that businesses turned to cloud computing during the pandemic — for remote work, customer services and productivity — they would be wise to continue, Ms Man said. “Companies hoping to minimize their risk exposure and anticipate future volatility challenges should think about it now,” she said.

The demand for cloud computing services, in which users rent computing resources, is strong. Global spending on public cloud services this year is expected to reach $494.7 billion, up 20.4% from last year, according to IT research and consulting firm Gartner. Inc.

estimates. Many companies use multiple clouds, which creates a range of options for storing data or running applications.

“The ability to easily choose where to place a workload based on profitability is a key capability,” said Brennan Sullivan, CIO of Quest Software Inc. “It’s such a fundamental necessity in any technology environment company that at this point I don’t see much correlation with market movements.

Technology companies are taking advantage of the continued demand for cloud computing.

The Salesforce logo displayed on the New York Stock Exchange last month.


Photo:

Michael Nagle/Bloomberg News

Selling power Inc.,

The largest pure-play vendor in the subscription enterprise software cloud market reported quarterly revenue of $7.4 billion on Tuesday, up 24% from the same period in the last year. The company, whose core product is customer relationship management software, is on track to surpass $30 billion in annual revenue this year.

The cloud computing units of tech titans like Microsoft Corp.

and Amazon.com Inc.

also continued to generate growth. In April, Microsoft reported $23.4 billion in cloud revenue for the quarter through March, up 32% from a year earlier, the company said.

For Amazon, the cloud was an island of strength in April, when the company posted its first quarterly loss in seven years. Amazon Web Services, the company’s cloud computing service, posted revenue of $18.4 billion in the first quarter, up 37% from a year earlier. Company-wide, sales increased 7% to $116.4 billion.

Growing data stores are also becoming essential to the operation of most businesses, said Erik Bradley, chief strategist at Enterprise Technology Research, a research firm. Bradley said he expects demand for enterprise technology platforms that provide data governance, data management and other analytical tools to continue to grow regardless of economic conditions.

Last year, data analytics firm Databricks Inc. raised $1.6 billion in a single fundraising round, bringing its private market valuation to $38 billion. In February, the company announced revenue of $800 million for 2021, an 80% increase over the previous year.

CIOs are still passionate about the technology that helps their companies pursue revenue growth, so there’s “no real opportunity to retract spending,” said John-David Lovelock, vice president of research and Distinguished Analyst at Gartner.

Write to Angus Loten at angus.loten@wsj.com

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