How is cloud computing faring during the current period of heightened volatility?
Eoin Treacy's view
How is cloud computing faring during the current period
of heightened volatility? - Veteran subscribers will be familiar with
our contention that despite the occasional euphoria associated with social media
it is cloud computing that offers the best potential to be the "next big
thing" from the perspective of a long-term investor in the technology sector.
Along
with cutting-edge healthcare, shares related to the cloud computing sector have
been among the best absolute performers on the Nasdaq for at least the last
two years. As a reality check, if a technological development is to create shareholder
value it needs to produce impressive earnings and create efficiencies that justify
the expenditure on it. Cloud computing ticks both these boxes. I last performed
a review of the relevant shares on June
28th.
Some
of the most high profile companies in the sector such as Apple
and Amazon have so far had relatively
shallow pullbacks and still remain above their respective 200-day MAs. This
is impressive against the background of concerted selling pressure across stock
markets but a continuation of this relative strength is probably contingent
on the wider market finding medium-term support soon and sustaining more than
a short covering rally. This is an increasingly bear market environment and
the potential for a lengthier consolidation and/or additional deterioration
for these shares has increased substantially. This article
from the Wall Street Journal highlights the increased competitive environment
between these two leading companies in the cloud computing sector.
IBM
had become somewhat overextended relative to its MA and has posted its largest
pullback since late 2008 as it reverted towards that mean. The $160 area appears
to be offering at least temporary respite but a clear upward dynamic and a successful
retest of a low will be required to confirm a return to demand dominance. Check
Point Software Technologies, Teradata
Corp and Salesforce.com have relatively
similar patterns.
BMC Software, EMC
Corp, Citrix Systems, Cognizant
Technology Solutions and Oracle Corp
have had considerably deeper corrections to date. They are all oversold in the
short-term and the potential for a short covering rally has increased. However,
such has been the technical deterioration sustained that a significant period
of support building will probably be required before investors will be convinced
that demand has returned to medium-term dominance.
Google
has been something of a laggard in the sector and has been largely rangebound
for the last 18 months. It encountered resistance near $600 three weeks ago
and is currently mid range. A sustained move above $600 would be required to
confirm a return to medium-term demand dominance.
Juniper
Networks failed to sustain the breakout from its base in March and extended
its decline over the last three weeks. While oversold in the short term, a clear
upward dynamic would be required to confirm at that at least temporary support
has been found.
The evolution
of cloud computing is unlikely to be overly impacted by sovereign debt issues
in the USA and Europe. This sector remains ripe with potential. However a large
number of shares have experienced considerable technical deterioration. From
the perspective of medium to long-term investors, purchasing opportunities are
beginning to present themselves. However, these shares will need to hold above
their nadirs, once formed, to confirm medium-term lows. Until then, this is
still a high risk environment.