Janus Sounds 'Dot-Com' Valuation Alarm On Cloud, Social-Media Stocks

Valuations for cloud computing and social media companies have risen to dot com-era levels, according to a mutual fund firm that many remember as emblematic of that era.

“Valuations for many of these companies seem just as stretch as Internet stocks were back then,” asset management firm Janus Capital(JNS) writes in its latest monthly equities update. Some Janus funds rode high-flying technology and communications stocks to big gains during the 1990s, but saw those bets sour as the tech bubble burst.

Investors this year have piled into shares of companies that make Web-based business software–the so-called “cloud” model popularized by Salesforce.com Inc.(CRM) and others. Likewise, ad-supported social media businesses such as Facebook Inc.(FB) have run up.

“These stories are easy to understand and embrace … perhaps too easy,” Janus writes. “In a slow-growth economic environment where investors are hungry for growth, we believe many investors have gotten caught in the hype-cycle around cloud computing and social media, chasing any and all stocks tied to those themes regardless of price.”

Salesforce is up 33% year-to-date. Workday Inc.(WDAY) has rallied 38% and expense-accounting software provider Concur Technologies(CNQR) is up 44%, to name a few.

Several peers have seen huge gains after initial public offerings this year. Benefits-software firm Benefitfocus Inc.(BNFT) rallied 102% in its trading debut while cloud-based cybersecurity software maker FireEye Inc.(FEYE) jumped 80%.

Meanwhile, the Global X Social Media Index exchange-traded fund is up 53%. Ad-supported social media businesses have rallied in the second half of the year as Facebook Inc. reported progress selling ads on its mobile app and hype swirled around Twitter Inc.'s(TWTR) $2.1 billion IPO.

These businesses deserve attention, as “cloud computing and social media are game-changing technological developments,” Janus says. But the firm notes that money-losing companies in the Russell Midcap Growth Index, many of them in these industries, returned 47.5% this year through September, outperforming the 25.4% gain in the index overall.

And like during the late 1990s, many of these high-fliers aren't producing much or anything in the way of profits, leading investors "focused too much on revenue, or revenue potential," Janus adds.

Meanwhile, tech companies with at least a $75 million market capitalization that went public this year have had an average 37.2% first-day return this year, Janus says.

“That nearly every tech IPO associated with trends sucha s the cloud and social media has risen so much suggests investors are chasing all of the companies,” Janus says. Just the dot-com era’s failures far outnumber Amazon.com Inc.(AMZN), Ebay Inc.(EBAY) and other success stories, “there is a high probaility that many, though not all, of these companies will stumble.”