A Look at the Clouds

Cloud computing stocks aren’t great investments right now, here’s why:

One Year Chart

VMware (VMW) had guidance lowered after it reported earnings last week and the company will also cut 900 jobs (yikes). The stock got hit on the news, and this one-year chart is as of today.

Profit growth is expected to be low for the next four quarters. With a P/E of 25 the stock is high and could fall until the P/E get to 20. VMW’s revenue is expected to climb 15% this year and I think the stock is worth 20 times earnings, or $63 (stock is $78 today).

One Year Chart

F5 Networks (FFIV) reported before VMW did, and surprisingly FFIV didn’t drop on the bad news from VMW. Still, there’s a lot of red on this chart, profit growth started slowing two quarters ago.

FFIV is expected to grow sales 13% this year, and I think the stock is worth 17 times earnings, or $85 a share (FFIV is $106 today). Honestly, FFIV might be the better investment now because VMW could warn again next quarter. This is the second straight quarter VMW has given cautious guidance.

Sharek’s Take

Cloud computing is going through a slower growth phase than in years past. Even though these VMW & FFIV are down, they aren’t great buys because profit estimates show 3% to 12% profit growth coming the next two quarters. Both stocks are overvalued by exactly 19%. Investors should look away from the clouds.