Up more than 60% this year, the WisdomTree Cloud Computing ETF (WCLD ) is proving the cloud computing theme is here to stay and that there’s plenty of room for competition and innovation among cloud ETFs.
The WisdomTree Cloud Computing Fund seeks to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index, an equally weighted index designed to measure the performance of emerging public companies focused on delivering cloud-based software to customers.
Buoying the long-term thesis WCLD is that an array of new markets for cloud computing are emerging, adding fuel to what’s already a robust growth story.
“Vertical software companies create software for one specific industry, like construction. Each vertical has idiosyncratic needs,” said WisdomTree Research Director Jeremy Schwartz in a recent note. “While a horizontal company like Salesforce operates across many industries to provide CRM (customer relationship management) software, they have a 20%–25% market share. In a vertical market, a company like Veeva, which goes deep in health care and provides CRM for life sciences, has an 80% market share. Vertical software has more chances to be a ‘winner-take-all’ market, and once you are a market leader, you can cross-sell products.”
Winning With WCLD
The rise of cloud computing has never been more apparent amid the Covid-19 pandemic. With social distancing measures in place, a lot of businesses have their heads in the clouds—that is, using cloud computing as a primary way to run their core businesses—something that will benefit cloud computing ETFs, such as WCLD.
Cloud computing represents a significant source of disruption not only in the technology sector but in the investment world as well. It has become ingrained in nearly every aspect of our lives by fundamentally altering how we consume, process, and share information in the digital age. The trend toward cloud-based solutions offers a compelling, long-term opportunity for investors to gain exposure to a quickly developing segment of the technology sector.
Growth is pivotal at a time when some market observers see valuations on the broader cloud space as somewhat rich.
Jamin Ball, vice president at Redpoint Ventures, “generally sees the valuations in the cloud space being a little rich, with the typical enterprise value to next 12-month revenue multiple trading in a range of 5x–10x, and the higher growth companies typically ranging from 10x–15x,” notes Schwartz. “Right now, the median company Ball tracks is trading around 13 times next 12-month revenues. Those multiples could come back through growth rates picking up or market capitalizations coming down, or some combination of those two.”
