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Why Cloud Stocks Could Be in Peril

These hotshots could quickly cool if the economy gets much slower


So far this year, the social stocks have been a disaster. IPOs from companies like Zynga (NASDAQ:ZNGA), Facebook (NASDAQ:FB) and Groupon (NASDAQ:GRPN) have seen losses that have ranged from 40% to 70%. But one hot tech category has been mostly immune: cloud-computing operators.

But could they be facing trouble, too?

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It’s important to note the big differences between social and cloud operators. The social industry is fairly new and vulnerable to fads. It’s also tough to monetize things, especially as traffic moves rapidly to mobile platforms.

For the cloud operators, things are much different. The industry has actually been around since the late 1990s, with pioneers like (NYSE:CRM) and NetSuite (NYSE:N). They have proven that companies will shell out big bucks for these services. Customers realize the cloud applications provide lots of benefits, such as ease-of-use, fewer integration headaches and more rapid upgrades.

In 2012, a variety of cloud companies have come public, such as ExactTarget (NYSE:ET), Demandware (NYSE:DWRE), Brightcove (NASDAQ:BCOV) and Bazaarvoice (NASDAQ:BV) — and all remain above their IPO prices. But investors still need to be cautious. If anything, their success will mean more cloud companies will hit the IPO market, which could mean an excess amount of shares for investors to absorb. Wall Street always seems to do this.

But the real issue for the cloud operators is the macroeconomy. With the U.S. weakening, companies will begin to put off expenditures — and an easy target is software. All in all, there’s no need to rush to make commitments. Why not wait until the economic clears up?

This may already be happening, but it’s had little impact so far on the revenue growth. How? Keep in mind that cloud operators cannot recognize sales up-front but instead must do so over a period of time, which can be several years. The reason is that most companies use a subscription business model. The result is that revenues are smoother.

But if there is a slowdown over the next couple quarters, it will definitely have an adverse impact. And when this happens, Wall Street could get spooked.

Now, the fall-offs probably won’t be as stark as seen with the social stocks. Consider that companies like IBM (NYSE:IBM), Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP) may swoop in and make buyout offers. Yet such things are never guaranteed.

In other words, the cloud stocks could be at risk, at least for the short run.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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