Cloud computing has become a hot topic in the business software industry. This technology essentially centralizes information and applications in data centers. Users can then access the software via their web browsers.
The “cloud” tends to be easier to use and more cost-effective when compared to traditional business applications. Keep in mind that there is no need to buy expensive servers or hire consultants.
Over the past few years, growth in cloud-related stocks has been torrid. As a result, investors have bought-up shares of the top companies. For example, for the past 12 months, Salesforce.com (NYSE:CRM) is up 64%, SuccessFactors (Nasdaq:SFSF) climbed 79% and NetSuite (NYSE:N
) is up 95%.
Nice, huh?
But as with any boom, investors need to have some caution. Things can easily go cold quickly.
In fact, we got a reminder of this last week. One of the largest cloud-hosting providers, Amazon.com (Nasdaq:AMZN), experienced technical issues with its infrastructure, which lasted for a couple days. Some sites affected included biggies like Foursquare, Quora andReddit.
Of course, these companies live and die by their reliability. Even a couple days of outages can be a big deal. This is especially the case with business applications.
What is unnerving is that Amazon is a top-notch company. It certainly understands the importance of solid performance, right? So if Amazon has issues, what about smaller operators?
In other words, for those companies that are considering cloud services, there will certainly be pause. After all, their legacy products are already stable, and are the result of major investments. Why switch to a newer technology?
It’s too early to tell what the impact of Amazon’s hiccup will be. The fact is that the cloud industry is seeing tremendous momentum and customers appear to be eager to make investments.
Take a look at Salesforce.com. Despite its large size, the company continues to grow like a scrappy startup. For the past year, revenue grew by 27% to $1.66 billion and cash flows were a juicy $459 million, up 69%. Currently, there is about $935 million in deferred revenue.
Despite all the growth, the cloud industry needs to remain extremely vigilant. If anything, it may want to try to rethink its model. Consider that there are a growing number of companies that are using a hybrid approach of cloud and on-premise applications. It allows for more integration across the platforms and also provides more comfort for mission-critical areas. Companies like FrontRange have been able to manage this approach.
Again, the Amazon problem may ultimately be a blip. But if there are other outages, the cloud computing industry will start to lose its luster. And the consequences can be severe. If there is a loss of confidence from customers, then this can stunt growth — and take some of the air out of the stock values.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
