Cloud Computing Bubble: Yes, It's Starting to Deflate A Bit

Cloud Computing Bubble: Yes, It's Starting to Deflate A Bit

Please don't misread or misinterpret the headline. The shift towards cloud computing remains real. And there are opportunities ahead for partners that develop effective cloud strategies. But if you slow down for the moment and analyze recent trends, you'll notice that a cloud computing correction -- an adjustment in expectations -- started about two months ago. I expect the cloud computing market reset to continue over the next few months. Here's why.

When 2010 gave way to 2011, investors and the media were super-excited about cloud computing. Our own Talkin' Cloud Stock Index rose nearly 20 percent during the first quarter of 2011. But since that time, cloud stocks and Wall Street have cooled off quite a bit. In broad financial markets, pessimists are worried about a potential double-dip recession. And within privately held technology companies like FaceBook, insiders are exploring ways to cash out because they're worried about inflated valuations, notes today's New York Times.

Time to panic about a cloud bubble? Not at all. Here's a balanced reality check:

  • The cloud trend will continue to accelerate as Apple iCloud, Google Apps, Microsoft Office 365, Salesforce.com and others introduce mainstream cloud platforms that even consumers can use.
  • Most of the companies within our Talkin' Cloud Stock Index remain profitable and growing. Let me repeat: Most of the Talkin' Cloud Stock Index members really deliver quarterly profits.
  • But here's the problem: Cloud company valuations may have grown too quickly -- outpacing the cloud market's actual sales growth. Imagine if you worked at FaceBook and 95 percent of your net worth was tied up in company stock you couldn't really sell. Of course you'd be a bit nervous having all your eggs in one basket. You might even consider quitting your job if it meant you could potentially take some money off the table, as The New York Times noted.

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During 1Q 2011, we saw cloud-centric companies like NaviSite, Savvis and Terremark get acquired at lofty valuations. Fast forward to the present and investors are taking a breather. Indeed, our Talkin' Cloud Stock Index has declined sharply in recent weeks. Now, the net gain so far this year is only about six percent -- far lower than the 19 percent gain we saw in Q1.

I suspect volatility will remain the norm in the weeks to come. Some cloud companies will implode as selected services commoditize. But don't get confused. The cloud is real. There are credible cloud partner programs that are worth exploring. It's just the cloud company valuations that are too lofty. Navigate the fallout and partner up with genuine cloud leaders.

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