Tech Valuations Tumble, but Business Software Stocks Are Cushioned by the Cloud

Technical valuations have been spoon-fed by rising interest rates, steep inflation and economic uncertainty, but not so much in enterprise software. Demand remains stable as companies continue to refocus on cloud computing and data, CIOs say.

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

and oracle Corp.

have shown resilience amid defeat in technology stocks. All three have so far outperformed declining market benchmarks since the start of the year.

On Wednesday, the tech-heavy Nasdaq Composite Index was down more than 23% since January. Over the same period, stock prices of IBM, which sells cloud-based business software and services, rose 4.3%.

Prices for HPE, an enterprise software company derived from computer maker Hewlett Packard, have remained roughly stable. On Wednesday, the company reported revenue of $6.7 billion for the quarter ended April 30, a 1.5% year-over-year increase, with online software orders roughly doubling from the prior year.

Selloffs continued to hurt major US stock indices, with the S&P 500 entering bear market territory for the first time in more than two years on Friday. WSJ’s Caitlin McCabe looks at some of the key drivers of market volatility. Photo: John Minchillo/Associated Press

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

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

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

said it would acquire VMware Inc.

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

“Technology is in more demand than ever before,” said Jim Swanson, executive vice president and enterprise chief information officer at New Brunswick, NJ-based health and consumer goods giant Johnson & Johnson.

The Covid-19 pandemic exposed the importance of capabilities such as cloud-based business tools to adapt to sudden changes in the market and weather uncertain times, he said.

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

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

estimates. Many companies use multiple clouds, creating a variety of options for storing data or running applications.

“The ability to easily choose where a workload is placed based on cost efficiency is an important opportunity,” said Brennan Sullivan, chief information officer at Quest Software Inc. don’t see much correlation with the movements of the market.”

Enterprise tech companies are benefiting from the continued demand for cloud computing.

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


Photo:

Michael Nagle/Bloomberg News

Sales team Inc.,

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

The cloud computing units of tech titans like Microsoft Corp.

and Amazon.com Inc.

have also continued to grow. 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 in effect in April, when the company posted its first quarterly loss in seven years. Amazon Web Services, the company’s cloud computing service, reported revenue of $18.4 billion in the first quarter, up 37% from a year earlier. Companywide, sales rose 7% to $116.4 billion.

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

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

CIOs still love technology that helps their companies drive revenue growth, so there’s “no real opportunity to pull back on spending,” said John-David Lovelock, a research vice president and senior analyst at Gartner.

write to Angus Lots at angus.loten@wsj.com

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