According to a study by global information company IHS Inc. (IHS - Snapshot Report), cloud-related tech spending is expected to witness an almost three-fold jump from $78.2 billion in 2011 to $235.1 billion in 2017. Multibillion-dollar investments in cloud-based architectures are expected to follow as more and more companies turn to cloud computing to offer online storage, computing, analytics and provisioning services to tackle a proliferation of huge data.
But before joining the bandwagon, companies must realize that technology is just a mere tool and not necessarily the only route to success. It is true that cloud computing can play wonders in transforming a business by offering a competitive edge, but a company requires more than just tools and technologies to succeed in the long run.
As each player in the industry strives to win a greater market share with reduced barriers-to-entry and competitive pricing, the battle gets increasingly murkier. With the global consumer cloud subscription tally projected to rise to 730 million this year from 630 million in 2013, the fight for dominance is understandably fierce. However, not all companies have been able to cash-in on the euphoria and have visibly lagged far behind in the race. Before we zero-in on such stocks that investors should avoid currently, let us have a quick look across the cloud to gauge the movements of the movers and shakers.
As commoditization of cloud services gains steam, service providers are reducing prices to gain more market share. This has led to intense price wars among rivals as one tries to outwit the other. When Google Inc. slashed prices for its Google Cloud Platform by up to 85%, market leader Amazon Web Services, the cloud computing platform of Amazon.com Inc. (AMZN - Analyst Report), followed suit the next day with a broad-based 36% to 65% price cut.
This further forced Microsoft Corp. (MSFT - Analyst Report) to take stock of the situation and come up with similar compelling offers for its cloud services. Microsoft reduced its prices in the band of 27% to 65%, the lower end of price cuts catering to ‘basic’ general purpose virtual machine and the higher end for Azure Blob storage service.
However, not all companies are aggressively following the pack. Price is one of three factors in the decision-making process for availing cloud computing services, the other two being quality and innovation. Experts argue that in order to maintain margins, tech companies will try to offset the price cuts with over-subscription of their services. This is expected to culminate in performance degradation, thereby eroding the financial benefits and leaving the customer at status quo.
Cloud services provider IBM Corp. (IBM - Analyst Report) has resisted itself from across-the-board price cuts and instead introduced special pricing deals for volume customers. Cisco Systems, Inc. (CSCO - Analyst Report) further pushed the envelope when it announced an ambitious plan to invest over $1 billion to build the world’s largest global Intercloud (a network of clouds) over the next two years. The Cisco global Intercloud is expected to raise the performance bar with an expanded suite of value-added application- and network-centric cloud services to accelerate the Internet of Everything.
In the eventful month of March, yet another cloud services provider Ingram Micro Inc. (IM - Analyst Report) decided to join the fray for global competition when it disclosed plans to extend its Ingram Micro Cloud into a worldwide services organization. Expanding its reach to 170 countries, featuring more than 200 solutions and 70 vendors, Ingram will implement a global platform to accelerate the adoption of cloud services.
3 Cloud Stocks to Avoid
Not all companies are able to capitalize on such positive vibes in the industry. Let’s take a closer look at these companies that appear to be falling much behind in the race and are expected to perform abysmally in the short-term.
NetSuite Inc. (N - Snapshot Report): Headquartered in San Mateo, CA, NetSuite offers cloud-based financials and enterprise resource planning (ERP) and omni-channel commerce software suites in the U.S. and internationally. This Zacks Rank #3 (Hold) stock has a poor year-to-date return of -8.1% (as of April 2, 2014).
The current Zacks Consensus Estimate for the recently concluded quarter is pegged at a loss of 24 cents, which represents a year-over-year decrease of 43.5%. The earnings estimate for full-year 2014 has also declined by 6 cents or 7.3% in the last 90 days to a loss of 88 cents.
Rackspace Hosting, Inc. (RAX - Snapshot Report): Headquartered in San Antonio, TX, Rackspace provides cloud computing services for small and medium-sized businesses through dedicated hardware and multi-tenant pools of virtualized hardware. With a year-to-date return of -15.7%, this Zacks Rank #3 (Hold) stock has witnessed a steady drop in earnings estimates.
The current Zacks Consensus Estimate for the recently completed quarter is pegged at 12 cents, which represents a year-over-year decrease of 39.0%. The earnings estimate for full year 2014 has declined by 12 cents or 16.7% in the last couple of months to 60 cents.
Veeva Systems Inc. (VEEV - Analyst Report): Headquartered in Pleasanton, CA, Veeva provides industry-specific cloud-based software solutions for the life sciences industry in North America, Europe, the Asia Pacific, and Latin America. This Zacks Rank #4 (Sell) stock has a dismal year-to-date return of -18.4%.
Earnings estimate for both the recently completed quarter and the ongoing fiscal have been revised downward. The earnings estimate for fiscal 2015 has declined by 4 cents or 16.7% in the last month to 20 cents.
With such disappointing metrics and grim earnings outlook, investors may be better off if they avoid these stocks.