In September, Box CEO Aaron Levie just barely won a tough board fight against the activist investor Starboard, which sought to replace several members of the cloud storage company's board with its own slate. Its chief complaint: Box's annual growth rate of 11% on $770.8 million in 2021 just isn't enough.
Not quite as dramatically but no less significantly companies like Zoom , Autodesk, and DocuSign also recently suffered the consequences of disappointing Wall Street. Each gave investors lowered guidance reflecting the reality that the slow return to the office meant the pandemic-driven boom in their respective businesses was likely over. Each saw their stock take a major dip.
Industry insiders see it all as a sign that even the hottest cloud software companies are suffering from a case of heightened expectations: After almost every major cloud company saw huge growth, much of Wall Street now seems to believe that even good, dependable revenue expansion isn't good enough.
"The cloud ecosystem has gotten a big tailwind from decentralized workforces and the work-from-home mandates," said Byron Deeter, a partner at Bessemer Venture Partners and a longtime investor in the cloud space. "And so what used to be considered acceptable growth is now being pushed out. And I think that is adding pressure on some of the slower-growing public cloud companies to perform even more."
Meanwhile, the titans of the cloud industry Microsoft, Amazon Web Services, and Salesforce have only gotten stronger over the past two years and show no signs of giving up ground in the market. That's made it increasingly hard for smaller software companies to compete.
This dynamic is pushing software companies like Zoom and others to find new ways to grow as the world returns to normal. Analysts say to expect further consolidation in the market as software companies that didn't grow massively during the pandemic or are showing signs of slowing down look for new options.
Zoom, for example, is focusing on its cloud phone business and telephony as what could be its next big market. (Its aborted $14.7 billion deal to buy Five9 would have marked a big push into the contact-center business.) Box launched an e-signature product to compete with DocuSign, while the 32-year-old firm Citrix bought the task-management startup Wrike in a productivity push.
The stakes are high for those companies, analysts say, with growth often depending on how well it navigates expansion beyond the core business. Those that can't nail it often face the end of their existence as an independent company.
"Best-of-breed companies either become multiproduct companies, and they can continue their organic or inorganic kind of standalone growth, or the thing that they do, they tap out, and they don't really know how to do the other stuff, and so then they get acquired," said Alex Zukin, an analyst at Wolfe Research.
While software is more important than ever to keep a business running, companies are looking to reduce the amount of software they buy, RBC analysts said in a recent note to clients. That, in turn, is leading them to spend with larger platforms, like Salesforce, Microsoft, or AWS, that bundle many products into subscription suites, the analysts wrote.
That puts even more pressure on independent software companies. Slack , the workplace chat app, spent the early days of the pandemic facing investor scrutiny about its ability to compete with Microsoft Teams in a remote-first world. Ultimately, Salesforce acquired Slack for $27.7 billion.
Experts say that getting snapped up isn't always a bad thing; it helps the larger players "inject modernity" into their business, Zukin said, while giving the acquired company access to the sales and marketing resources they need to stand a better chance of competing.
Ultimately, however, the experts agreed that in this environment of heightened expectations, the only way for a software company to ensure survival or at least independence is to become "mission critical," literally irreplaceable to customers, including by expanding their product lineup.
"So it is increasingly important that software companies have the ability to become a larger platform," RBC analysts said in a note earlier this year. "Otherwise they risk being unable to gain meaningful traction beyond a certain threshold."
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