Beaten-down cloud software stocks get boost as ServiceNow and Qualtrics top estimates

Key Points
  • ServiceNow and Qualtrics, two notable cloud software companies, topped estimates on Wednesday and delivered guidance that also exceeded expectations.
  • Both stocks were up big after hours, giving a boost to a sector that's been hammered of late.
  • "We are in a sustained demand environment here," ServiceNow CEO Bill McDermott said on his company's earnings call.

In this article

Bill McDermott, CEO of ServiceNow.
Adam Jeffery | CNBC

Maybe cloud investors just needed a little reassurance.

Following a brutal stretch that's seen one cloud computing index tumble 38% from an all-time high in November, two key members of the group — ServiceNow and Qualtrics — delivered optimistic numbers on Wednesday, spurring an after-market rally in their share prices.

ServiceNow, whose software automates back-office IT tasks and workflows, jumped 10% on better-than-expected first-quarter results and an upbeat outlook for the year.

Qualtrics, a provider of software that helps companies communicate with customers and track their experience, climbed more than 9% after soaring past estimates for the fourth quarter and in beating expectations with its 2022 guidance.

Tech stocks entered earnings season in a downward spiral, with the Nasdaq headed for its worst month since 2008. The index is still down 13% in January, but most of the companies that have reported so far have provided signs of optimism.

"We are in a sustained demand environment here," ServiceNow CEO Bill McDermott said on the earnings call after his company reported 29% growth in the fourth quarter and predicted 26% growth in subscription revenue for the year.

Microsoft and Intel beat on the top and bottom lines this week and exceeded estimates with their guidance, while IBM and Tesla also reported better-than-expected results. Among the most notable large-cap names, only Netflix has disappointed investors, as the company's prediction for subscriber growth came in far below estimates.

Netflix is still a very cheap stock, says Oakmark Funds' Bill Nygren
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Proving time for cloud stocks

Aside from Netflix, the selloff has not been about business fundamentals.

Rather, the plunge has largely been attributed to the prospect of rising interest rates. The Federal Reserve on Wednesday indicated that it's likely to soon increase its benchmark rate for the first time in more than three years, and the market is pricing in four rate hikes in 2022, according to the CME's FedWatch tool. 

Cloud stocks have been hit particularly hard as investors rotate out of the companies that performed the best during the bull market. From the end of 2019 through October of last year, the WisdomTree Cloud Computing Index jumped 146%, while the S&P 500 rose 43% over that stretch.

Investors have been dumping those stocks of late in favor of more conservative companies in energy and the financial sector. Despite the trends on Wall Street and the severe multiple compression in the parts of the market that were overheating, cloud companies now have the opportunity to show that the growth story remains intact.

Cloud stocks vs. broader market

Businesses, government agencies and large organizations around the world continue to adopt digital technologies and cloud services that allow their employees and customers to work faster and make better use of their data. There's no end in sight for the shift in spending from legacy software to the cloud.

In his opening comments on Wednesday, Qualtrics CEO Zig Serafin said his company has a "10-year head start," in what it calls experience management and helping customers take action on their data.

"Our growth demonstrates we also have a significant opportunity ahead in a world where it is easier than ever for customers to change service providers and where employees are leaving their jobs at record rates," Serafin said.

Qualtrics reported a 48% increase in year-over-year revenue in the fourth quarter and forecast growth of at least 30% for 2022.

The cloud sector has plenty of opportunities in the coming weeks to prove that inflation and fears of higher interest rates aren't yet hurting demand.

Software collaboration vendor Atlassian reports results on Thursday, followed by, Paycom, Twilio, Datadog and Freshworks in early February.

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