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February 13, 2013 11:03 pm
If the stock market is to be believed, cloud computing – the use of shared computing resources via the internet, rather than local hardware and software – is in trouble.
Last week Akamai, which helps clients deliver content and services over the web, reported a quarter in which revenues grew 17 per cent from the year before; operating profits grew even faster. High-flying results, but expectations were higher still. The stock fell 15 per cent. On Tuesday evening Rackspace, which hosts clients’ websites and software applications, reported sales and profit up by a quarter. The market was not impressed. Rackspace’s “public cloud” business – whose customers pay as they go for usage of a shared data centre, as opposed to renting dedicated equipment – grew a mere 50 per cent, decelerating from the previous quarter. The stock lost a fifth of its value.
The fundamentals have changed little, however. Both companies deploy a lot of computers to make internet services work better. This is capital intensive. Akamai’s capital expenditures amounted to 12 per cent of sales in 2012; at Rackspace the figure was more than 20 per cent. But as the companies grow, returns on that capital are ticking up. Free cash flow is rising fast. And the rates of sales growth, while they decelerated slightly in the recent quarter, are still robust.
The perceived value of high-growth companies is very sensitive to even a small downward shift in growth expectations. The public whipping of Akamai and Rackspace seems excessive, though, especially considering that both have bounced back from single-quarter disappointments before. This is especially true of Akamai, which trades at just 18 times forward earnings (Rackspace’s multiple is still about 50 times). If you believed in either company before the results, you should believe still.
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