Thursday, February 9, 2012

Cloudy Earnings In The Cloud Software Sector

Over the last couple of weeks, several cloud software stocks have issued guidance that disappointed the markets. In most cases, the original estimates weren't that aggressive for stocks with relatively high valuations. Not being able to make estimates was beyond disappointing.

Back a few months ago, this article analyzed the sector after SuccessFactors (SFSF) agreed to be bought out by SAP for a 52% premium. At the time, I highlighted how the stocks had very aggressive valuations for the expected earnings growth. Now, even that potential upside doesn't appear to be coming forth.

So why are these companies struggling to hit earnings estimates if the sector is supposedly booming? Part of the issue is that these companies spend a lot of money to sign contracts where upfront expenses aren't always matched with 1-2 year contracts. The faster the growth in billings, the more difficult it can be to produce earnings in the short term.

Read the full article on Seeking Alpha.


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