Clouds are fascinating. They come and they go. They acquire a whole new experience if you’ve had shrooms. They appear dancing, fighting, playing, singing all at one like a drama that no real world theatre can replicate.
“Clouds that wander through the sky,
Sometimes low and sometimes high;
In the darkness of the night,
In the sunshine warm and bright.
Ah! I wonder much if you
Have any useful work to do.”
Clouds are serious business in India with 40% of population have direct/indirect dependance on agriculture and allied activities and contributes about 16% to total GDP. Rice, milk and wheat are the biggest terms of value (US$90bn, 2013) and its uncertain ways are a cause of massive heartburn across rural India. So much so that agriculture is exempt from Income tax!
My reference here is however to the more invisible type of cloud- Cloud computing. The definition of the term on Wikipedia states “Cloud computing is an information technology (IT) paradigm that enables ubiquitous access to shared pools of configurable system resources and higher-level services that can be rapidly provisioned with minimal management effort, often over the Internet. Cloud computing relies on sharing of resources to achieve coherence and economies of scale, similar to a public utility.”
My experience with cloud is through the iCloud interface of iPhone which enables shared files on the iMac, iPad and MacBook. In a way its the sole reason apart from the cool designs which has kind of left almost no scope for switchover to any other platform. In many ways it makes you a slave. For almost every other utility you have a choice, which have petered away profits from most industries. As Peter Thiel quotes in his book ‘Zero to One’ –
“Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.”
Now coming back to cloud computing and opportunities in the Indian markets, 8K Miles is an interesting company in the space. For person with a non-IT background, there is limited ability to understand the intricacies of the business where there is limited scope for channel checks etc., we can only go by what management says. They are present in the Pharma and healthcare space in the US enabling large corporates to move to the cloud -both public and private. They have made series of acquisitions in the past in US to gain market access and technical capabilities. The key benefit they offer is savings in the hardware budget and ensuring IT security and meeting compliance requirements of agencies such as USFDA etc. Honestly, unless you are an expert in such fields, you can only try to use your understanding from elsewhere and guess things from your lenses of past experience. You can try to simplify things, but only so much as is possible.
All said and done, valuations, financials etc., vis-a-vis the price of the stock has to make sense before you attempt to decide if its worth your time to dive in. They have been growing 40-50%yoy on the back of a low base. However, there were several red flags such as low cash conversion, market perception, change of auditors etc which have to weighed in the backdrop of size of opportunity. If one goes through its historic stock performance – it went up by a massive 120x in 5-6x yrs (rather phenomenal) and was trading 10x sales and 150x cash flows in early 2016. And goes to show the humongous wealth creation for the early investors. However, a reject in every metric for much of 2016 and did not warrant any further enquiry.
At around end of 2017 with a combination of gradual de-rating and improving business performance, valuations fell to around 1.5x sales and 12-15x cash and did warrant digging further and an exposure if other things fell in place. And in hindsight it did prove right with the stock surging 150% in about 2 months!
This is what makes investing a very hard and complex business. Perception of time varies significantly from person to person and tradeoffs are essential. Management bias is a given as incentives are pinned in the that direction as ‘never ask a barber if you need a haircut’! I guess a simpler heuristic to follow here could be, if it fits your metric for valuations and if growth is coming through, debt levels are comfortable and time is not an issue, you stay put.
Rather writing on this piece has made me more appreciative of the real clouds. A gift of nature which, we do remember when we get stuck in traffic on a rainy day.