Breakout Quarter for Cloud Computing Stocks

Breakout Quarter for Cloud Computing Stocks

Some time back I had discussed the possibility of cloud computing stocks being valued more than they are worth (See: Are Cloud Computing Stocks Overvalued?). While, personally speaking, I believe that cloud computing stocks have more solidity than their vaporous counterparts during the Dotcom Bubble, I did recommend caution.

Perhaps this quarter will be a good time to examine the fundamentals of cloud computing stocks, considering they have had the best time in the markets in recent times. A lot of the exuberance was fueled by consolidation in the space, with some bigger companies making a play for the smaller entities. This includes Verizon’s offer to buy Terremark and Time Warner Cable’s offer for NaviSite, with both the target companies’ stocks rising 50% after the announcements.

Besides cloud computing service providers, companies that make hardware for the industry, have also seen an upsurge in their share prices. The biggest beneficiary has been SGI (formerly Silicon Graphics), with its stock rising 137% last quarter, most of it in February after the company reported stronger-than-expected earnings and a possible move into profitability in 2011. SGI, as its website says, “markets and sells a broad line of low-cost, mid-range and high-end scale-out and scale-up servers and data storage solutions as well as differentiating software.”

Other than Massachusetts-based Akamai Technologies, almost all cloud computing stocks had a favorable quarter. Missouri-based Savvis (formerly Savvis Communications Corporation) experienced a 45.3% increase in stock price between 31 December 2010 and 31 March 2011, followed by Rackspace Hosting (36.4%) and Limelight Networks (23.2%).

Returns in the cloud were considerably higher than those in the market indices. The Dow Jones Industrial Average was up 6.7%, the S&P 500 rose 5.6% and the NASDAQ Composite Index was ahead 4.7%. These are much lower than the returns delivered by two of the lesser companies on the list, Equinix and Internap, who have returned 12% and 8% respectively. With such exponential rise of stock prices in this space, cloud computing stocks do merit a closer look.

By Sourya Biswas

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