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Cloud Bubble Ready To Pop?

This week marked the debut of the first cloud-focused ETF, a fund comprising of cloud companies.

The release of the First Trust ISE Cloud Computing Index Fund (Ticker: SKYY) begged the question: Are cloud stocks going the way of dotcom holdings more than a decade ago?

In a short segment Thursday, CNBC asked two analysts to weigh in on the matter: Brad Whitt, enterprise software analyst at Gleacher and Co. and James Staten, vice president principal analyst at Forrester Research.

Whitt is bullish on cloud stocks, pointing to the fact that cloud companies have executed well since the end of 2009 and he doesn't believe that their market valuations are overheated.

"We've seen the metrics continue to accelerate in the past six or seven quarters," Whitt said. "We are also seeing tremendous end user demand. We attend a lot of user conferences and trade shows and we continue to see a lot of demand. Systems integrators are definitely getting behind the cloud computing initiative, and lastly I think the expectations in valuations are reasonable. We are nowhere near the dotcom valuation levels, so if the companies continue to execute, which we think they will, the end user demand is still there."

Forrester's Staten was more bearish, arguing the hype might be outstripping demand for cloud services.

"The hype around how much cloud demand is out there is beyond what really we're seeing," Staten said. "We're definitely seeing enterprises that are interested in using the cloud and we see them actually putting things in there, but they're not getting ready to shut down their datacenters and move it all in there, and that's a lot of what is behind all the hype."

Whitt countered that stocks that he considers cloud companies are all seeing anywhere from 20 to 40 percent revenue growth.

"That's not what I consider hype growth-type expectations," Whitt said. "I'd agree with James that companies are going to move slow. They're going to start with private clouds, they're going to adopt Software as a Service, which we've seen from companies like Salesforce."

Posted by Jeffrey Schwartz on July 08, 2011 at 11:58 AM


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