Moore’s Law Applied to Cloud Software Will Result in a Seismic Shift
Data driven cloud software is an enormous opportunity in the next decade.
The cloud software companies have not only thrived during this past year, reaching a collective market capitalization of over $2 trillion, but have also largely surpassed the FAANG companies as the fastest growing segment of technology.
There are a series of high performing cloud-based software companies that pioneered the category of Software-as-a-Service. Though many companies in the Bessemer Cloud Index will become long-term market leaders, the clear category kings have been Salesforce, Workday, and ServiceNow. These are the cloud native companies that disrupted legacy on premise infrastructure with easy to use, scalable platform solutions.
They have opened a larger addressable market of smaller customers who can build upon, and integrate with their platforms. These cloud native SaaS companies are transforming the landscape, and as they evolve, the best-in-class SaaS metrics evolve alongside them to capture their path to success. “New” metrics like the popularized “Magic Number”, helping companies determine the impact of sales and marking spend on ARR growth, and “Net Retention”, a measure of your customer churn which includes upsell and expansion opportunities, have materialized to complement the more standard metrics related to growth rates and gross margins.
A new class of software companies is emerging that combine the attractive elements of a SaaS company: scalability, high margins, recurring revenue and visibility into revenue, with the key attributes of Moore’s Law: increasing efficiency at scale.
The new paradigm of data driven software companies became clear to me while listening to the CrowdStrike (Nasdaq: CRWD) earnings call on March 16th. This was an impressive earnings call with a clarity of strategy and excellence of execution.
These software companies achieve efficiency of scale by utilizing their massive data stores for machine learning. Data is being generated and becoming available at historic rates and as companies make the transition to the cloud, they are able to access their data and take advantage of the powerful flywheel of intelligence and insights it offers. Simply put, the bigger the database and the better the data, the better and more plentiful the insights.
CrowdStrike initially aspired to be the Salesforce of cybersecurity. It has become so much more.
At the time of the IPO of CrowdStrike in 2019, the company was capturing just above 2 trillion events per week (where events correspond to potential security breaches). Today, CrowdStrike logs 5+ trillion events per week. These events inform CRWD’s Threat Graph and create a reinforcing loop that drives increased accuracy. The scale of the data is monumental, and without cloud-scale AI, analyzing this amount of data with such efficiency would be impossible.
No other cyber security company has anywhere near this level of data or resulting insights. CrowdStrike has an unprecedented competitive advantage that will continue to accelerate.
The buy side on The Street has repeatedly underestimated the growth potential of CRWD, in part because they don’t understand the nature of the company, but the data speaks for itself. A Goldman Sachs research report published last week noted that CRWD is the fastest growing company within their universe of cloud software companies – now trading at EV/Revenues FY 2022e of 28x and growing 45% faster than pre-COVID estimates.
We are thrilled by the results and continued potential of CrowdStrike, but our optimism expands well beyond this single portfolio company of ours. When you add cloud-scale to SaaS, you get record growth. This crossover is where we focus, and where we expect to see the biggest opportunities of the next decade.
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