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Original Post From Dana Blankenhorn

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Let me state at the outset that I'm bullish on “the cloud.”

I have been at tech reporter for three decades, and cloud computing is the real deal. With a virtualized operating system running workloads over many distributed machines, you can scale a job to infinity and avoid the cost of high-priced servers. Clouds also give you the chance to finally create value from “big data,” all those weblogs you've been hanging on to. Cloud computing is also cheap as chips – you can rent bits of Amazon.com's cloud for pennies per hour.

We're also at a major inflection point when it comes to cloud. Companies that have benefitted from public clouds, like those of Amazon.com (NASDAQ: AMZN), Google (NASDAQ: GOOG)and Microsoft (NASDAQ: MSFT), are now ready to move major corporate workloads to their own clouds. These “private clouds” would then be connected to public clouds, creating a “hybrid cloud.” Doing that means switching from a simple cloud infrastructure, like that of Amazon EC2, onto their own cloud “platform,” which includes the tools needed to write, or re-write, real applications.

In 2013, people are going to get very serious about the cloud. This means that expertise in running clouds, especially open-source clouds that can be made compatible with private clouds, will be much in demand. Rackspace (NYSE: RAX) has that talent in spades, having been the initial sponsor of the open-source OpenStack cloud infrastructure, and they run their own system on OpenStack.

Still, $72.75/share for Rackspace? That's an implied P/E of over 100. The market cap of almost $10 billion comes to about eight times the company's expected sales for all of 2012. Those numbers have been rising, but not much more than 20% per year. This is no Amazon.

Other cloud leaders are also selling at pretty steep prices these days. VMware (NYSE: VMW)has a P/E multiple of 56. RedHat (NYSE: RHT) is near 70, and I've got some shares of that one. Obviously, I think there are some cloud highfliers I think will turn out well, even at these prices.

But compare what you're paying for RAX with what you'll pay for Microsoft today. Microsoft also has a cloud, called Azure, and many people like it. Microsoft has a host of tools that can be used on Azure, so it's got a cloud platform, not just infrastructure. But its current PE of 14.69 is misleading. It includes a loss for the June quarter created by the write-off of its ad network assets. Take that out, subtract the $66 billion in cash on the balance sheet, and the real P/E of Microsoft is closer to that of Ford (NYSE: F) than of the market.

All enterprise computing companies are moving into cloud computing as fast as ever they can.IBM (NYSE: IBM), Oracle (NASDAQ: ORCL), Dell (NASDAQ: DELL) and Hewlett-Packard(NYSE: HPQ) all see it as their top priority. They won't all succeed, but there will be competition, a lot of it, and given that reality I think we're at, or near, peak valuations for cloud specialty companies, if not for folks with cloud expertise.

When the crash comes, it's going to come fast, and it's going to come hard. Any disappointment in earnings for these cloud companies is going to hit a very unforgiving market. I would much rather play with IBM right now than Rackspace, and at present valuations, I think my money held in Microsoft may even be safer than my new investment in Red Hat.


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