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Unless you have been living under a rock for the last decade you have heard about "the Cloud." "The Cloud" is a buzzword that describes networked computing and data storage between different devices, users, and offices. For all practical (non-geek) purposes it's basically the concept of using the internet to do any computing anywhere.

Regardless of how crudely I define this buzzword or how zealous experts will disagree with my assessment, this has been an investment theme. Investors should be disciplined and refuse to pay outlandish valuations for one of the hottest tech trends.

Checking Valuations

There are many different large-cap firms, which connect different devices or provide data storage solutions. They are valued from cheap to expensive:

Ticker

Company

Industry

P/E

P/S

P/B

P/FCF

BRCD

Brocade

Data Storage

19.59

1.18

1.2

5.1

CSCO

Cisco Systems

Networking & Communication

11.73

2.01

1.81

10.46

EMC

EMC

Data Storage

20.76

2.51

2.46

9.87

JNPR

Juniper Networks

Networking & Communication

50.11

2.13

1.31

27.93

PANW

Palo Alto Networks

Networking & Communication

5542

14.75

16.45

59.93

RVBD

Riverbed

Networking & Communication

45.19

3.64

3.92

13.05

As it turns out, other valuations on this list are not sensible when considering disappointing sales and earnings developments.

EMC Disappoints

EMC cut its sales forecasts after it reported quarterly earnings fell short of predictions. This lowered guidance and its weak results have been blamed mainly on a weak economy. EMC is the world's largest maker of storage computers had to deal with reduced demand as corporate clients curbed their spending to cope with the weak economy.

EMC's Chief Executive Officer Joe Tucci ascertained that companies in the computer industry can only expect moderate sales growth. According to Tucci, "Economic and political uncertainties are affecting business confidence and this is affecting IT spending."

International Business Machines (IBM) and Microsoft (MSFT) that deal in computer services and software respectively also had actual sales falling below estimates. This proves that the scenario is not unique to EMC and companies seeking to be competitive will have to seek other ways to improve revenue.

Though EMC's recent performance was below par, it can take pride in its VMware holdings, which reported profits exceeding estimates in the third quarter. VMware's commendable performance can be attributed to it gaining corporate clientele. EMC owns majority shareholding in VMware, which is the leading developer of software that enable computers to run multiple operating systems. EMC can bank on VMware's growth, following the recent appointment of Jonathan Chadwick as Chief Financial Officer.

CISCO Lost Bid

Cisco missed out on a big contract recently when it submitted a bid to the California State University system estimated to be about six times more than the winning bid. The winning bid was submitted by Alcatel-Lucent (ALU) for $22 million.

Cisco customers often feel that Cisco overprices its products and this scenario was certainly consistent with this theory! Cisco, however, seems to be in denial about this issue. Vice president for Cisco's education sales Kim Maerus said, "Put simply, there is no way that Cisco's bid was six times higher than the winning bid." These figures are believed to have come from the person in charge of collecting the bids, Michael Davidorf, director at cyber infrastructure at CSU. Davidorf said, "All the vendors had to propose exactly the same solution." The other companies were also given the same infrastructure list containing the requirements of CSU. Cisco went ahead to provide the price list and discounts available for the given equipment. Some readers feel that the reason the bid from Cisco was higher was because Cisco already had a $28 million deal to supply for San Jose University in CSU. SJSU never solicited bids for the project but simply looked at the industry and chose Cisco. This means that Cisco couldn't have bid lower than this amount because it would raise questions about its pricing policy. This would put the company in a dangerous position.

These issues underscore the reality that Cisco will be forced to compete on price in the future. It is no longer widely considered the only solution for networking amid many competing companies.

Juniper Profits Falling

Timber! Juniper Networks (JNPR) reported profits that were below analyst estimates for the third quarter. Forecasting between 19 and 22 cents falls short of average analyst estimates of 24 cents. This has been attributed to increasing competition in computer network equipment from Cisco Systems. Caris & Co. analyst John Slack said, "The environment, particularly on the carrier side, is very difficult."

Sweeping changes have been proposed for Juniper including a lay-off of 500 jobs and the adoption of new technologies. These upgrades in technology are also not likely to benefit the company until 2013. Though it will be upgrading its systems, its capital spending probably won't meet historical levels given the atmosphere of belt-tightening.

Conclusion

Networking stocks are rapidly following computer chip makers and data storage device makers to increased price competition and lower valuations. Investors should not assume profitability is easy or in any way guaranteed. Instead, investors should think about each company as being one of many rivals competing to service a group of cash-strapped customers with limited technology budgets.

Among networking names on this list, Cisco and Brocade are among the cheapest based on valuation. Investors should consider them as potential buys in this sector. EMC is richly valued, especially for a data storage provider and Juniper is richer still.

Source: 6 Cloud Stocks: Where Are The Buys?