Sunday, October 10, 2010

Is cloud computing hitting an air pocket?

In late August, my comment "Is 3PAR frenzy" a 3-ring circus?" highlighted the high valuation of this "cloud computing" acquisition that resulted from a bidding war between Dell, Inc. (US: DELL) and Hewlett-Packard (US: HPQ). While cloud computing has been an interesting theme in the technology market for a while, investor enthusiasm for 1) a major technology transition, 2) an open ended market opportunity or 3) some price charts with strong upward moves was overdone. This past week Equinix, Inc. (US: EQIX), a firm associated with the cloud computing theme, announced a slight earning shortfall which resulted in a one day stock drop of over 30% and sent the stocks of other related names such as Citrix Systems Inc. (US: CTXS), Rackspace Hosting (US: RAX), VMware Inc. (US: VMW), Salesforce.com, Inc. (US: CRM), and F5 Networks Inc. (US: FFIV) down 7% or more.

MY TAKE: This week's price action should be a reality check for cloud computing investors. While these companies have fundamental business propositions, cloud computing is not a spiritual experience. Investors should be cautious about 1) merger and acquisition frenzy, 2) momentum trading and 3) media cheerleading. Investing is never a simple process and understanding valuation is important. The stock valuations of this group were very extended.

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