Cloud-Software Businesses Are Gaining Traction

salesforce-logo-635The first cloud-software business was Salesforce.com, and it is now valued at close to $40 billion. A second wave of online software companies is starting to gain traction in the marketplace. Not only are they more specialized, but they are also commanding multibillion-dollar valuations that could be hard to sustain over the long-term.

These corporations, with names like Veeva Systems, DocuSign Inc. and Cvent Inc., are not household names. They are dedicated cloud businesses focusing their attention on specific industries, such as hospitality and health care. In some instances, they are going after slices of the market like project management or marketing. 

A niche approach in the cloud. This approach works well for them because the market is large enough that they can successfully go after these types of niche verticals. These niche providers could eventually affect the growth of the bigger players, such as Oracle Corp. SAP AG, International Business Machines Corp. and Salesforce.com, all leading companies with a more broad scope of service.

While Workday Inc. and Salesforce.com offer software that can be described as “one size fits all,” some of the specialized providers have better profit margins because they don’t have to spend as much capital on sales and marketing. However, some customers have warned of potential problems with future growth, saying that smaller companies providing industry-specific software may have trouble meeting the needs of international clients.

Trading high. Last year, about a dozen cloud software companies held public offerings. Cvent posted an average return of about 50 percent, according to Renaissance Capital, the IPO investment adviser. The companies are trading at extremely high valuations. Veeva Systems, which is valued at more than $4 billion, is trading at 158 times expected earnings for 2015. Cvent has a market value of close to $2 billion and trades at 400 times its expected earnings. Salesforce has a multiple of 90 times expected earnings.

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