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For Investors, ‘Cloud Computing’ Moniker Demands Scrutiny

Hedge fund manager David Einhorn's 66-slide attack on Athenahealth hasn't done much to change the company's share price, which dipped briefly but is now up nearly 2% from where it traded when Mr. Einhorn called the healthcare tech company wildly overvalued.  

Investors may be shrugging off the short seller, but he raises questions about what constitutes a cloud company that caught my attention. He makes his argument at a time when the market is grappling with how to value cloud stocks: The basket of 18 cloud computing companies tracked by The Information has fallen about 24% since the beginning of March. Even Zendesk, whose recent IPO was a boost for the sector, has fallen about 14% from its peak, though it’s still trading above its IPO price.

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The cloud sector’s retreat has prompted many to look beyond top-line sales growth to see what weaknesses might be hidden by big revenue gains. If investors want to avoid paying for growth that they never see, it’s crucial that they differentiate between companies for whom cloud is a business model and those for whom it’s a marketing tool.

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“Consulting and professional services are the bad words,” one venture capital investor said when asked about what makes a good cloud investment.