The broad ETF, which includes 39 companies involved with cloud computing, provides a diversified way for investors to access the sector as valuing individual companies could be unorthodox. While the cloud computing space has attracted more investment dollars, observers are unsure how to properly value the companies
For example, of the 26 index members to recently go public, 21 are losing money on the generally accepted accounting principle basis, with a combined $388.7 million in the red last quarter – many of the companies opt to incur large expenditures upfront and amortize costs later through revenue streams. Consequently, traditional price-to-earnings ratios may not properly reflect valuations.
Instead, most of these cloud computing-related business models rely on churn and retention – it takes about a year for a customer to become profitable due to costs of sales and market, so the companies rely on renewal rates, which is why subscriber rates are so important for companies like Netflix as witnessed in its last earnings report. [Netflix Post-Earnings Rally Could Lift These ETFs]
First Trust ISE Cloud Computing Index Fund
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