First quarter was business as usual for cloud companies -- and that's a bad thing

Cloud Companies are growing, and they’re losing money. If that’s all you know about them, it’s enough. Those two facts define the industry more than any hyperbole coming out of Silicon Valley. Much as their predecessors did 15 years ago, today’s tech companies are selling an exciting new technology; and like the dot-coms, they’ve embraced a business model that will self-destruct at the first sign of trouble.

With few exceptions, and regardless of size or sector, these businesses are running losses. Many are funding themselves through the issuance of new stock, either directly or through stock compensation – a strategy that works well during the good times, and only then. Investors prize growth, so there’s little incentive for thesecompanies to sacrifice it by raising prices. On the other hand, costs have become worse rather than better, with SG&A (sales, general, administrative) expenses eating up ever-greater portions of revenue.

At the moment, these companies are simply growing and hoping – a plan perfectly suited to springtime, though a little uncomfortable as summer closes in. With earnings season now behind us, we can see whether this strategy is paying off.