Shares of Amazon, Microsoft and Salesforce.com have been red hot for the past couple of years. Why? Two words: The cloud. Cloud services is the hottest trend in tech. The real question is, are cloud computing stocks really worth outlandish multiples, or is this just another massively overhyped tech trend or, God forbid, a bubble.
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Amazon is up a whopping 138% over that period – not because it’s the biggest online retailer in the U.S., but because its Amazon Web Services cloud business dominates the market. Never mind that AWS accounts for just 7% of the company’s sales. It’s the cloud, stupid. The cloud drives profits.
Funny thing is, Amazon investors never gave a hoot about profits before. On the rare occasion that the company actually makes money, net income is miniscule and the stock trades at triple-digit P/E multiples, as it does today. Suddenly, profits matter, but just cloud profits. Retail profits, not so much. That makes no sense.
Microsoft’s stock languished for a decade under Steve Ballmer, but since Satya Nadella took the reins and declared the software giant to be a “mobile-first, cloud-first” company, shares have skyrocketed 50%. Microsoft’s cloud computing platform Azure is still relatively small, but unlike its other businesses, at least it’s growing.
Meanwhile, companywide sales and profits have been down for years, but investors are still excited. Why? You guessed it: the cloud.
There’s just one problem with this scenario. When everyone figures out that the cloud has serious limitations and suddenly the next big thing is a hybrid model with many applications and services migrating closer to the edge, otherwise known as “the fog,” the cloud will become the kiss of death.
You’ll see; it will happen. It happens every time. Every hot tech trend is the next big thing … until it isn’t.
Remember when dot-com was all the rage. Pets.com. Kozmo.com. eToys.com. Go.com. Those companies raised hundreds of millions of dollars in venture capital and went public on lousy fundamentals. And when the bubble burst, any company with a “.com” in its name was suddenly toxic, whether it had a solid business model or not.
They say a rising tide lifts all boats. When the dot-com bubble burst, every internet boat suddenly sprung a leak. The same thing will happen when the market turns on cloud stocks; mark my words.
Of course, the next big thing to take advantage of all those data centers in the cloud is the Internet of Things (IoT): a web of interconnected, smart sensor networks that automatically transmit data to the cloud for super-efficient decision-making by humans and machines. Everything will be smart, connected and automated.
Tech companies are beginning to position themselves in the IoT space, but the smart ones are doing so cautiously for one very important reason: the trend is extremely broad and Wall Street has yet to figure out who the winners will be. But that hasn’t stopped everyone from GE and IBM to Cisco and Intel from jumping on the bandwagon.
Intel CEO Brian Krzanich recently made a big splash about the chip giant’s evolution from a PC company to one that “powers the cloud and billions of smart, connected computing devices,” meaning IoT. Unfortunately, the chip giant is not nearly as evolved as its PR would seem to indicate.
For one thing, Intel’s cloud computing platform is little more Xenon processors for servers. Nothing new there. And those billions of smart devices are powered mostly by ARM, which Softbank is acquiring for $32 billion, and a bunch of companies known collectively as ABI (Anyone But Intel).
To be fair, the company that put the silicon in Silicon Valley does have an IoT business, and if you pull out your trusty magnifying glass, you can see that last quarter it was all of 4.7% of revenue, up from 4.1% the previous quarter. At that rate, it’ll be significant about the time Intel decides to drop its core PC processor business, meaning never.
It’s telling that the company once known simply as the world’s biggest chip maker (which it still is) is scrambling to align itself with two hot trends it has yet to deliver on. It shows just how desperate Intel is to stay relevant in a world increasingly dominated by Apple, Google, Amazon and Facebook.
And therein lies the rub. When it comes to tech trends, you can’t just latch onto the hype. You’ve also got to have a credible, differentiated growth strategy behind it. Otherwise, all you’ve really got is hype. And when the market turns, as it inevitably does, all you’ll have left is bupkis.