By John Darsie
During the session yesterday, cloud computing stocks were weak, but the real damage came after hours following the F5 Networks, Inc. (FFIV) earnings report. The company narrowly missed revenue estimates and revised down Q2 revenue forecasts. The stock gapped down more than 20% overnight and has continued to fall during today's session. The collateral damage has been painful, too.
Let me remind you, this is not the first time we have seen revised guidance trigger a panic sell-off in the cloud computing stocks. Back on October 6, a warning from Equinix, Inc. (EQIX) triggered massive selling in the sector. High fliers like VMWare, Inc. (VMW), salesforce.com, inc. (CRM) and Rackspace Hosting, Inc. (RAX) -- just to name a few -- came crashing back down to earth. That time around, the sell-off created an outstanding buying opportunity. I picked up RAX at $22.85, CRM at $99.85, and EQIX at $72.36 that day (I still own RAX and CRM, and sold EQIX above $82). I also think EMC Corporation (EMC) is a great play on cloud, and Powershares Dynamic Networking ETF (PXQ) presents a great cloud-play portfolio for ETF investors.
Cloud investors like myself were less than thrilled when opening my charts today. To compound that, the action so far intraday has been concerning. FFIV continued to drop, down ~3% during the session. RAX is down more than 10%, also trading lower intraday, but is holding in well at important support areas around $30. The #1 stock in the IBD 50, Riverbed Technology, Inc. (RVBD), has fared slightly better intraday after also getting hurt after-hours. Based on the intraday action, I believe RVBD is the best candidate to fill the gap and make it back to highs sooner rather than later.
So the ultimate question remains: For the long-term, is this massive drop buyable? Right now, I'm on the fence, but leaning towards yes. (I am buying FFIV around $108 with a stop at the day's low around $106.) Cloud computing stocks carry lofty valuations, and excitement over their future can be partially a product of the collective conscience ("cloud computing" just sounds exciting, doesn't it?). Although they continue to have a strong growth story, even the slightest earnings miss (as has been illustrated by EQIX and now FFIV) can trigger a massive and rapid drop.
Although it has paid to be "balls to the wall" long, to borrow a phrase from David Tepper, during this rally, I am of the opinion that much of this market is built on a house of cards created by the Fed and Treasury. Artificially propping up asset prices creates price instability, and thus a boom and bust cycle. Rather than smoothing out peaks and valleys in the business cycle, our policy makers create and magnify them. The cloud sector has been a perfect example.
I also believe the shift away from investing in companies towards pure momentum speculation has been as damaging to the market as HFT. But who can really blame the individual for wanting to exercise tighter control over capital, given the outdated, rickety market structure? It's like faulting an individual for carrying a gun in a crime-riddled city. In the end, the real blame should fall at the feet of regulators, who are either crooked or inept.
Due to the nature of today's market, though, I feel the biggest risk for the cloud computing stocks, and other momentum stocks, is that momo traders will fall out of love, not that growth will slow considerably. To use another example to illustrate my point, the risk for Apple Inc. (AAPL) of Steve Jobs' departure lies not in deteriorating quality of products or declining revenues, necessarily, but in the perception of the momo trading herd. For cloud computing bulls, this exaggerated example of today's "stairs up, elevator down" action each quarter might get a little old after a while. For now, though, I remain cautiously optimistic about buying the drop in cloud computing (with tight stops). Let's hope cloud stocks don't find themselves alone on Valentine's Day.