While the rest of the market was going crazy over the last week, companies most identified with the cloud barely budged.
It's a bit counter-intuitive. Boom sectors are supposed to be hit hard in a downturn. The rule of thumb is you go inside during the hailstorm.
One reason is these stocks got in their correction early.
Take the analysis back a month, rather than five days and the performance of these cloud stocks do indeed trail that of the Dow Jones average. The Dow is down 11% since mid-July. But VMWare (NYSE:VMW) is down 11.63% during that time, Amazon.com (NASDAQ:AMZN) is down about 14.2%, Rackspace (NYSE:RAX) is off 14.68%, and Red Hat (NYSE:RHT) a big 16,85%. The technicians, by the way, see Red Hat's resistance level as up only $2.33 from here, so much of that loss won't be retraced soon.
What does all this teach us? Speculative issues can be a “canary in the coal mine” to the rest of your portfolio, showing that trouble is ahead long before it comes to the rest of your portfolio. They can be a forecasting tool.
But in this case, something more basic is about to happen. Cloud is hot. It's so hot everyone wants to, or wants to claim to be, cloud. Every major vendor now has a cloud strategy, minor vendors claim to have one, small ones say you can install them in one.
Red Hat, Rackspace and VMWare are essentially arms merchants to the cloud, but most of the cloud is open source, meaning that what sounds like hype likely has some reality to it. By simply supporting these new platforms, any enterprise system can become a cloud system. By adapting them, and since they're open source they are pretty easy to adapt, they can do what they claim to be doing.
There are advantages and disadvantages to being open source. It's good to build from a high, shared platform. Shared infrastructure can be like an Interstate Highway, allowing all traffic to move faster.
But open source does not create many barriers to entry. Any barrier is quickly condemned by the digerati, and can quickly create headwind in the market. Not that there aren't barriers to entry. Amazon's scaled system is a serious one, because once you get inside it's hard to move away. The same could be true for Google, which has still not commercialized its cloud the way Amazon has.
In time, however, the benefits of open source tend to flow upward, not down. A year from now, today's open source cloud innovations will be part of most enterprise vendors' toolkit. The software will fall long before the hardware and services become commodities, but remember the whole point of this exercise was to reduce the cost of running scaled applications, to save customers money.
By this time next year, the three software vendors mentioned here need to be on to their next trick or the game will be over.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.