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TheStreet Open House

Why HP May Be Next Cloud Bubble to Pop

NEW YORK (TheStreet) -- While Google (GOOG) and Amazon (AMZN) have rolled over in price, and IBM (IBM) has fought to hold steady, Hewlett-Packard (HPQ - Get Report) has kept powering upward, helped now by its planned $1 billion investment in cloud computing.

HP's shares are up nearly 45% since CEO Meg Whitman came on board in September, 2011, and a spectacular 170% since their November 2012 low. With the company's market cap now at about half its sales, some analysts still consider it a bargain.

But this looks like a bubble that is ready to pop.

Hope for growth at Hewlett-Packard lies in cloud computing. The company said this week it will put $1 billion into cloud products and services over the next two years, using the brand name Helion, and deliver its own distribution of the open source OpenStack cloud infrastructure system.

The problem is $125 million a quarter is chicken feed in the cloud wars, and profits there are becoming increasingly hard to come by. HP doesn't even lead the OpenStack project. Red Hat (RHT) is the largest contributor, followed by IBM.

The 29 analysts currently following HP stock expect earnings per share to come in at 88 cents when results for the April quarter are announced later this month. That would beat the January quarter's 74 cents per share by about 20%.

So far, Whitman has kept earnings high through cost-cutting, with plans to cut 5,000 from the payroll during this fiscal year alone. But this is also the year Whitman promised the company would start growing.

Cloud is a big part of that. The company's plan is to package its data centers as private clouds, to build public clouds for enterprise customers using OpenStack, and to make big promises on security and privacy that enterprises will pay up for.

The problem is that every other tech giant is doing the same thing. IBM said it would put $1.2 billion into building 40 OpenStack data centers in January. Intel (INTC) put more than $700 million into buying just a piece of a single cloud software outfit, Cloudera, in April.

All these investments are dwarfed by the billions being put into cloud by Amazon, Google and even Microsoft (MSFT), each of which may put $1 billion into the space this quarter alone.

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