Cloud computing is set to overtake traditional on-premise solutions in IT spending, and the market valuation for cloud computing will surpass $500 billion by 2020, according to a new report.
The report, based on a three-month long study by prominent cloud investor Byron Deeter and his venture firm, Bessemer Venture Partners (BVP), found that total market cap for a group of 42 publically traded cloud companies will pass $500 billion by 2020. Deeter, who has invested in software as a service (SaaS) cloud companies like Box, DocuSign, and Eloqua, delivered the report at the recent Cloud CEO Summit.
In the report, BVP predicts that cloud-based SaaS customer resource management (CRM) platforms like Salesforce will overtake on-premise solutions by 2016 and go over 50% in that segment’s IT spending.
“The depth and breadth of cloud progress is pretty shocking”, says Deeter. The report tracks the growth in the total market cap of cloud companies from $5.6 billion in 2006—just $500 million more than Amazon Web Services’ 2014 earnings—to $56.6 billion in 2014.
The report marks a rebound in market cap for publically-traded cloud companies, many of whom faced a correction in stock prices in 2014 and lost up to 30% of their market cap. “We think thinks were overheated last year, but you could almost argue the opposite now,” says Deeter.
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Despite those impressive numbers for publically traded cloud companies, more than half of cloud revenue today comes from startups, according to the report. Private startups in the cloud IT sector are often valued at twice the multiple as the index of publically traded cloud companies, according to the report. According to Deeter, this is due to aggressive competition over early investment in private companies. “Private valuations are harder to justify,” says Deeter. “There aren’t opportunities to buy so people are having to be aggressive.”
In his presentation, Deeter states that he believes private valuations will fall in the near future, but that many successful private cloud companies will go public by 2020, when BVP predicts the public index will pass $500 billion.
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