In cloud stock tumult, investors give valuations a reality check

Tue Feb 9, 2016 4:39pm EST
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By Sarah McBride and Noel Randewich

SAN FRANCISCO (Reuters) - Global economic uncertainty and worries about weak spending on information technology are forcing investors in cloud computing stocks and related enterprise companies to take a reality check.

The deep selloff, sparked last week after business analytics company Tableau Software Inc (DATA.N: Quote) gave a dismal sales outlook, has put a dent in earnings multiples of several marquee business technology names. They include (CRM.N: Quote), Workday (WDAY.N: Quote) and Splunk (SPLK.O: Quote).

With fourth-quarter earnings reports so far a mixed bag, investors are on edge about cloud companies, which deliver software from remote servers on a metered, pay-as-you-go basis.

"Shoot first, ask questions later. That's the mentality of technology investors right now," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "Any disappointment is being taken out to the woodshed."

Cloud-related stocks have rewarded investors handsomely in the long term, with an index of 44 cloud-related stocks tracked by venture capital firm Bessemer Venture Partners up 84 percent over the past five years, compared with the S&P 500's rise of 49 percent.

On Tuesday, enterprise technology stocks were mostly higher, with Workday flat and Oracle Corp (ORCL.N: Quote) down 1.5 percent, while Tableau and Salesforce recovered 5 percent.

As the stock market moved sideways last year, once-astronomical price/earnings multiples trickled lower in a sign that some investors were already taking notice of levels that many consider unsustainable.

But some companies' multiples remain at stratospheric levels. recently traded at 55 times expected adjusted earnings, while human resources cloud companies Workday and Cornerstone onDemand Inc (CSOD.O: Quote) have P/Es above 1,000.   Continued...

Getco Securities specialist traders work at the booth that trades Tableau Software on the floor of the New York Stock Exchange, in this May 17, 2013 file photo.  REUTERS/Brendan McDermid