Cloud Computing Bubble Looks Like Dot-Com Bubble, Warns UBS sock puppetThe sock puppet, the icon of the last tech bubble. Is cloud computing driving another one?

A new research note from UBS compares the current value of tech stocks with the dot-com era, and concluded that cloud computing may be driving another bubble.The analysis might be open to a different interpretation, however — cloud computing is truly revolutionary, and companies specializing in that area will outperform the rest of tech.

The analysis, called “Are We In A Cloud Computing Bubble?”, looks at the top 40 most expensive tech stocks now and in March 2000, the peak of the dot-com bubble. (UBS determined these stocks by looking at price-to-forward-earnings ratio and enterprise value versus sales from the last twelve months, and required a minimum $500 million market cap.)

A lot of the companies on today’s list have a cloud computing element, like (cloud computing apps for businesses), Netflix (whose future growth is predicated on delivering video over the Internet), and Akamai (which provides necessary infrastructure for delivering content online).

On a lot of fronts, these companies are safer than their dot-com predecessors: absolute P/E ratios and enterprise value/sales ratios are much more reasonable.

But UBS applies another layer of analysis and finds that these top 40 companies are pulling away much more rapidly from the rest of the pack than their dot-com predecessors were. That is, in the dot-com era, stock prices for the entire tech sector were rising in lockstep. This time, the overall global tech sector has seen a decline in valuation over the last few years, but these top 40 companies have been rising rapidly:

UBS clloud bubble chart

Photo: UBS Investment Research

The takeaway: “investors may be more highly concentrated among these top performers than even during the dot com bubble, adding a further element of risk particularly if the cloud names cannot sustain their growth momentum.”

UBS also looked at another trend — capital expenditures on the data centres used to deliver cloud computing services. UBS notes that it was this kind of analysis — “in hindsight” — that pointed to a bubble among Internet and communications equipment companies last time around.

UBS datacenter spending

Photo: UBS Investment Research

Here, UBS concludes that data centre growth justifies the high prices of these cloud computing stocks over the last two years, but is sceptical that the trend can continue through the year.

The note concludes that the companies who have outperformed the tech market for the last two years will have “have a difficult time repeating this feat in 2011 if prior trading patterns hold this year.”

Cloud enthusiasts might point to that “if” to launch a counter-argument: the reason that these companies are outpacing the rest of the tech sector is because they’re at the forefront of a once-per-generation technology shift, like from mainframes to PCs in the late 1980s.

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