How are cloud software stocks looking?
"The cloud software stocks have pulled back hard from their highs, down on average 19%, but that doesn't mean they're worth buying. Cramer dove into these software-as-a-service stocks to assess the damage and see if there's more pain to come," wrote TheStreet's Scott Rutt in his Mad Money recap.
"The losses amongst this group has been jaw-dropping, Cramer noted. Of the 75 names he looked at, the average declines were 37%, with 26 racking up losses greater than 40% and 15 of them had more than 50% declines. But despite these losses, the fundamentals remain strong. That's why he said the "Rule of 40" still applies when valuing the cloud stocks," he continued. "The Rule of 40 states that a company's revenue growth plus its EBITDA margin must be greater than 40. This gives a company two ways to win. They can have lots of growth with low margins or high margins with less growth. If a cloud stock has neither growth nor margins, then investors need to steer clear."
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