It seems that almost every company in the information-technology-services world now calls itself a “cloud” company — and they should.
Collaborating remotely is now the way of the world. And there has been an explosion in profits of companies providing such services.
Still, in any industry there are winners and losers. A good way to find the winners is searching for companies that are boosting sales rapidly while maintaining pricing power.
Starting with the Nasdaq Composite Index COMP, -0.93% and the S&P 1500 Composite Index (made up of the S&P 500 SPX, -0.65% the S&P 400 Mid-Cap Index MID, -1.38% and the S&P Small-Cap 600 Index SML, -1.97% ), we looked at companies in the information-technology services, internet software/services and packaged-software industries, as defined by FactSet, which provided the data. We then narrowed the list to U.S. companies with market capitalizations that exceed $1 billion.
This left us with 99 companies. Among this group, 15 companies have increased their quarterly sales by at least 20%, while also expanding their gross profit margins. A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It is an indication of pricing power. A narrowing margin might mean a company has been using heavy discounting to defend its market share or as part of a push to increase sales, which cannot be sustained.
The combination of rapidly increasing sales and good pricing power could provide the basis for your own research. Before considering an investment, you should take a careful look and consider whether a company’s strategy will enable it to remain competitive over the next several years.
This data screen excluded some well-known cloud players, such as Microsoft MSFT, +0.04% which increased fourth-quarter sales by 12% form a year earlier, while improving its gross margin to 61.64% from 61.18%. It also excluded Amazon.com AMZN, -1.39% which is categorized by FactSet as a an internet-retail company. Amazon Web Services increased fourth-quarter sales by 45% to $7.43 billion. However, this represented only 10% of the company’s total sales.
As you can see, these stocks have been on fire this year. That may not be a surprise, considering that the technology-heavy Nasdaq was up 9.5% for 2019 through March 5. It will be interesting to see whether analysts are being overly conservative in their expectations for these companies. This is a phenomenon recently described by Raife Giovinazzo, the portfolio manager of the Fuller & Thaler Behavioral Small-Cap Equity Fund FTHFX, -1.60%
The numbers for all these companies are for fiscal quarters ended Dec. 31 or later, except for Okta OKTA, -0.16% whose numbers are for the quarter ended Oct. 31. Okta is scheduled to announce its results for the quarter ended Jan. 31 on March 7 after the stock market closes.
