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Investing Beyond the Hype Cycle

The cloud is in the process of rolling over in its hype cycle, just as it starts to achieve real results for business. You can see this in the stocks of VMware (VMW), RedHat (RHT) and Rackspace (RAX), all of which have fallen hard in the last few months as hype has turned to a demand for unreasonable returns that were never there in the first place.

Cynics may note that Amazon doesn't seem to have fallen like this. But it has dropped $25/share in price since January, from its high of $283 to its present price of about $258.

But with Amazon, it can be argued the cloud is just one piece of the business, which is a bet on the future of its physical infrastructure -- not just cloud but warehouses and logistics. That story remains intact, and has gone beyond the hype cycle. Thus, a loss of roughly $12 billion in market cap could be just the cloud coming to Earth.

Where the hype cycle really has an impact is on closing the door to new competitors, shutting off their financial oxygen. Piston Cloud, for instance, with its cloud stack you can load from a memory stick, or Nebula, with its $100,000 cloud box, may not get the prominence they might otherwise because they're just late to the party. They will have to prove themselves.

The hype cycle has a purpose. It's designed to attract capital to places that need it. It can deliver spectacular returns to those who know how to ride the wave.

But to ride it you have to time the market, getting out while the getting's good, or you have to be there for the long haul and wait for the cycle to crest before you invest a dime.

At the time of publication, the author was long DDD, RHT and GOOG.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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