The transition on the software side of the tech industry has been profound. In the 1990s, Internet companies traded on criteria that were largely subjective, such as potential future revenue or potential market share. Few could demonstrate a plan for sustainable growth, and even fewer could show a profit.
However, the revenue model for today’s software companies is different. Cloud company businesses, for example, sell their services on a subscription basis, often with a customer commitment of a year or more, and sometimes with payment received up front, which leads to a more predictable revenue stream. What’s more, cloud computing represents a fundamental shift from hardware to software over the long term. As more services move to the cloud, enterprise customers are shifting their computing budgets from buying hardware they keep inhouse—such as PCs, servers and storage equipment—to buying a package of software services delivered by the cloud provider. At many companies, even the workplace PC, once an office fixture, is being replaced by workers’ own laptops or mobile devices, all connected to the office via the cloud.
At the same time, this shift creates a rapidly growing opportunity for cybersecurity services and software. Security is the top area of spending among businesses looking to protect their networks, for example. As more workers and consumers shift to mobile devices for some or all of their work-related tasks, the need for greater security has continued to rise. In addition, growing demand from changing fields such as health care, in which the use of electronic medical records is being driven by new government regulations, only heightens the need for stronger cybersecurity measures.
Terry Kontos is a managing director and portfolio manager for the TIAA-CREF organization. Justin Lam is a director and equity research analyst for the TIAA-CREF organization. Willis Tsai is a director and equity research analyst for the TIAA-CREF organization.