The ARK Web x.0 ETF (NYSEArca: ARKW) is up nearly 80% this year and more than doubled over the past 12 months. Figures like that could imply near-term upside is limited from here. In reality, ARKW may just be getting started and a new age of software could be an epic long-term driver for this actively managed fund.
ARKW components “are focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud, enabling mobile, new and local services, such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services, internet-based products and services, new payment methods, big data, the internet of things, and social distribution and media,” according to ARK Invest.
Although it’s positioned to capitalize on multiple growth themes, ARKW offers compelling exposure to the megatrend of software as a service (SaaS).
“In the past few years, the number of enterprise Software-as-a-Service (SaaS) companies going public has increased significantly,” writes ARK analyst James Wang in a recent white paper. “Once a nascent and unproven way of serving and selling software, we believe SaaS has become the de-facto business model for both startups and incumbents. While not new, its addressable market and growth seems to have caught many investors by surprise.”
Bolstering the long-term case for ARKW are some alluring data points, including the forecast of the enterprise software space growing at a compound annual growth rate of 21% per year through 2030.
“Cloud computing is perhaps the most important enabling technology behind SaaS companies,” notes ARK’s Wang. “Before cloud computing became widely available, internet software companies had to be experts in building and running data centers, increasing the cost, complexity, and difficulty of scaling an internet software company significantly. Introduced in the mid-2000s,7 cloud computing—specifically infrastructure-as-a-service—made it possible to rent compute resources instead of buying them.”
What’s interesting about ARKW’s current composition is that it doesn’t just hold some SaaS names and call it a day. The fund also features allocations to companies that are powered by the cloud, including electric vehicles, fintech, and streaming entertainment names, just to name a few. That structure could better position ARKW to capitalize on SaaS trends than some traditional rivals.
“The Software-as-a-Service model is a win for all stakeholders—developers, customers, and investors,” according to Wang. “As such, we believe that over time, the vast majority of software revenue will be recurring. Two forces are driving increased SaaS adoption: first, traditional software companies are transitioning their businesses from perpetual license terms to recurring or SaaS terms, as shown below. Second, most of the new software IPOs operate on a SaaS or marketplace-based model.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.