Cloud Stock Mania Comes With Eerie Echoes of Dot-Com Boom and Bust

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This year will be remembered as a terrible time for the economy, with a few exceptions. Cloud computing is one.

The blockbuster $3.4 billion stock market debut of Snowflake Inc. stands out as a prime example of the industry’s success despite a bleak economy. The cloud-data company more than doubled its share price in its first day of trading, on Sept. 16. The same day, another cloud computing company, JFrog Ltd., raised more than $500 million in its initial public offering. A global exchange-traded fund of cloud computing stocks has risen 11 times more than the broader stock market this year.

All the hype has observers making comparisons to the dot-com days, when investors pushed the share prices of profitless internet companies into the stratosphere, only to watch it end horribly. This time there’s also a reasonable-sounding rationale for the exuberance: Today’s global pandemic has increased the importance of cloud companies in a work-from-home world.

There’s “a confluence of factors that’s aiding cloud adoption—remote work, the move away from on-premise data centers with Covid-19, and fast internet connectivity,” says Mandeep Singh, a senior technology analyst with Bloomberg Intelligence. “The IPO market is booming for companies exposed to secular trends such as cloud and e-commerce.”

Still, for professionals who witnessed the froth of the late 1990s firsthand, it’s hard to shake the feeling that a bubble could be forming once again. The S&P 500 software and services industry group is sizzling hot, trading at 38 times reported earnings—the same valuation as in late 1998, when the dot-com bubble was starting to inflate. “All they have to say is ‘We’re in the cloud, we’ve got cloud solutions,’ and all of a sudden they get a bazillion valuation on it,” says Paul Nolte, portfolio manager at Kingsview Investment Management. “Similar to ‘I’m on the internet, I have dot-com after my name’ in ’99.”

The Global X Cloud Computing ETF is up 58% this year and has almost doubled since its lows in March, when the pandemic forced governments to start locking down the economy. Of the 36 stocks in the fund, only four have posted negative returns in 2020. Five of the stocks have climbed 170% or more. The bulls hold there’s a method to the madness. The world was already becoming more digitized; the pandemic and stay-at-home economy it’s created only accelerated that process. That’s benefited the stocks of cloud computing companies, as more people take up the technology in what looks like a lasting shift toward remote working. “They’re in a unique situation,” says JJ Kinahan, chief market strategist at TD Ameritrade. “They have not only added clients, but they’re going to be able to add sticky clients.”

Take Zoom Video Communications Inc., whose cloud-enabled video services have become the go-to platform for many people working from home. In the fiscal second quarter, Zoom saw revenue more than quadruple from a year earlier, to about $663 million. The company has suggested in its forecasts that stellar growth will continue. Its shares are up more than 600% this year. Or consider Twilio Inc., whose shares have tripled in 2020. Retailers have used the company’s tools for curbside pickups, and health-care providers have leaned on the platform for telehealth services. While not profitable, Twilio reported sales in the second quarter that were 46% above levels a year ago.

To Erika Karp, founder and chief executive officer of Cornerstone Capital Group, that’s the key difference between the internet bubble and today. Cloud companies are demonstrating real growth, while the 1990s dot-com boom was based on hopes for the future. “Back then we were making up metrics for performance. We were making stuff up that was not real, it was not fundamental,” she says. “Now I think we’re talking about actual fundamental growth, actual earnings growth.”

On top of everything else, with brokerages cutting fees to zero and many people stuck at home in the lockdown, individual investors have flooded into the market. Data show they’ve been extremely active in the market for options—financial instruments that give a trader the right, but not the obligation, to buy or sell a stock at a specified price in the future. To offset those bets, the firms selling the options buy the underlying stock, fueling further price gains. “There’s a bit of overexuberance,” says Donald Selkin, at Newbridge Securities Corp. “Definitely, it reminds me of 1999.” —With Claire Ballentine and Vildana Hajric

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