Why You Should Fear the Cloud Bubble Illustrated By the NASDAQ’s Rise

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NASDAQ - Why You Should Fear the Cloud Bubble Illustrated By the NASDAQ’s Rise

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What’s a cloud worth? No one really knows. It’s obvious that a network of scaled data centers, maintained with cash flow from renting or using them, is an incredibly valuable thing to have.

Only five U.S. companies have them. I call them the Cloud Czars. Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB). They are also the five most valuable companies in the NASDAQ … the five most valuable companies in the world. Together, they are worth nearly $4 trillion.

When considering the Cloud Czars, we must add companies that are the cloud’s heaviest users. That includes companies like Netflix NASDAQ:NFLX), and Adobe (NASDAQ:ADBE), as well as the suppliers for its upgrades like Nvidia (NASDAQ:NVDA).

Combine these companies and you have the source of the NASDAQ’s incredible runup, up 128% over the last five years, almost double the gain in the S&P 500. NASDAQ 5,000? It opens June 21 at 7,781.

Where’s the Roof?

I have seen this movie before. It was the dot-com bubble in the late 1990s.

The difference is that this time the stocks in the bubble have real sales and real profits. By some measures it’s hard to call current values a bubble at all. Apple, for instance, sells at just 18 times earnings. But Facebook is now at 33 times earnings. Alphabet is at 50 times earnings, double what it was a few years ago, and Microsoft is at 69 times earnings. Let’s not even talk about Amazon, at 220 times earnings.

While warning about the meaning of this I have been conducting intellectual exercises about it, such as a recent piece where I suggested Facebook could buy Disney (NYSE:DIS).

Those focused on the “big money” battle among Comcast (NASDAQ:CMCSA), Disney and 21st Century Fox (NASDAQ:FOXA) might want to know that Facebook is worth more than all three combined, by about 50%. Netflix has also blown up by the value of the network owners, at a market cap of $181 billion.

But does this make sense? Facebook had $40 billion in revenue last year, Netflix $11.7 billion. Comcast, meanwhile, had $84 billion in sales, Disney $55 billion and Fox $28.5 billion. By that measure, the cloud-based players are minnows next to the entertainment giants. But the market doesn’t see it that way.

Again, it is true that clouds are a unique, dirt cheap, way of storing and distributing any kind of information — text, video, code or the results of code. Clouds offer an opportunity to create applications that anticipate users’ needs, and that can process a machine’s requests as fast as the machine can make them.

But what is that worth? You still must distribute what the “Cloud Internet” delivers to the field. AT&T and Comcast dominate that space, but their market cap is a fraction of that of the cloud players, even while they continue to gobble up the content the cloud supposedly runs on.

The Bottom Line

I continue holding two of these Cloud Czars, Microsoft and Amazon, in my retirement account. I have taken profits on the others and would gladly buy more once they are at reasonable levels. These are excellent, well-run companies. I’m not criticizing their management, their strategies or their execution.

But, again, I have seen this movie before. I saw it in the 1980s with Japanese assets. I saw it in the 1990s with internet stocks. I saw it in the 2000s with real estate. Even the best assets have a maximum price, and when the market recognizes they have reached that price, it’s a long, way to fall.

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Dana Blankenhorn  is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in T, MSFT and AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


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