The Case for Cloud Computing Stocks and Funds

Cloud computing equities and exchange traded funds are taking breathers this year. In this case, “breathers” mean trailing tech-heavy benchmarks, not wilting away.

Take the case of the WisdomTree Cloud Computing Fund (WCLD). One of several dedicated cloud ETFs and one of the better-performing funds in the category, WCLD is up just over 15% year-to-date, but that trails the 21.3% returned by the Nasdaq-100 Index (NDX).

Sure, it's accurate to call WCLD and other cloud computing assets “laggards” this year, but that's a symptom of how much investors got spoiled by these stocks. And if flirting with all-time highs and returning over 15% through the first eight months of the year is lagging, astute investors will see that as a sign of strength and perhaps get involved.

Why WCLD is still wonderful

Remembering that there's a clear difference between a negative performance and lagging the broader market while generating positive, investors shouldn't be hasty in abandoning cloud stocks and funds like WCLD.

Actually, the opposite approach may be warranted particularly when some prominent cloud trends remain in place. Even if surging demand is ignored (it really can't be), other factors, such as a steady stream of cloud computing initial public offerings (IPOs), are still in place.

In fact, WCLD is levered to that trend because the BVP Nasdaq Emerging Cloud Index, WCLD’s underlying index, recently added some of the newest public cloud names.

“The most recent IPO addition from April 2021 was UiPath, a company focused on automating business processes across various departments of an enterprise,” says WisdomTree analyst Kara Marciscano. “More specifically, UiPath’s software platform uses artificial intelligence (AI) to perform tasks like logging into applications, extracting information from documents, moving folders, filling in forms and updating information fields and databases.”

Two of the other newest members of the WCLD have been public since January and last December, respectively. That's a sign of flexibility and nimbleness on WCLD's part and one that shouldn't be ignored by investors.

Of course, not all IPOs, cloud or otherwise, are worth investors' time or capital, but the BVP Nasdaq Emerging Cloud Index stringent screening process is a positive for investors. Part of that methodology includes significant revenue growth demands, meaning not any old cloud stock will clear the bar for entry. This works in investors' favor because the three new additions to the WCLD roster have average trailing 12-month sales growth of 41%, according to WisdomTree data.

Don't forget M&A

When it comes to using ETFs as plays on mergers and acquisitions (M&A), investors need to be choosy because some ETFs may be home to more buyers than sellers and some may have a dearth of credible targets.

Not only is WCLD home to a credible mix of buyers and sellers, it's already established a reputation as a legitimate hunting ground for cloud consolidation in just two years on the market.

“Similar to February 2021, all of the drops from WCLD are pending acquisition targets. It is especially reassuring that the removals are not because of failures to meet growth requirements, but instead because these businesses are attractive takeover candidates," adds Marciscano. "This brings the tally to 16 companies held within WCLD that have been acquired or are pending acquisitions at premium deal multiples."

In other words, WCLD covers a lot of bases for investors and its 2021 “laggard” status is likely overstated because the long-term outlook here remains compelling.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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