Cloud computing stocks and the related exchange traded funds are proving resurgent. Just look at the WisdomTree Cloud Computing Fund (WCLD), which is higher by nearly 29% year-to-date.
Undoubtedly, some of that bullishness is attributable to technology – the home sector of cloud stocks – ranking as one of this year’s leading sectors. Of course, astute market participants demand more than “sympathy” returns. When it comes to cloud computing stocks and ETFs such as WCLD, investors want to know that underlying fundamentals are strong.
Fundamentals are always important, but that when it comes to cloud stocks, that scenario is heightened at time when interest rates are reside at multi-decade highs and as some analysts are forecasting pullbacks in corporate tech spending.
WCLD Has Allure
From a valuation perspective, cloud stocks are rarely inexpensive – a trait that often sparks concern among investors. However, valuations are lower on a year-over-year basis, indicating there could be opportunity afoot in the space.
That’s particularly important in the case of WCLD, which tracks the BVP Nasdaq Emerging Cloud Index. The $706.4 million WCLD allocates more than 68% of its weight to mid- and small-cap stocks –segments that are often pricey in the tech sector. However, annual recurring revenue in the cloud computing industry has been steadily increasing over the past several years. That’s impressive when considering some of the headwinds that hit growth stocks last year.
“Funding growth, though, has generally become more challenging with interest rates at around 5%, making debt and equity capital more expensive,” noted BNP Paribas. “As a result, many tech companies are now striving for profitability (if they were previously incurring losses), and those that were already profitable are focused on expanding margins. These efforts are likely to continue as long as interest rates are high, and investors should clearly welcome a focus on profitability and margins.”
WCLD has appeal for long-term investors on multiple fronts. First, it eliminates the stock-picking burden. Second, cloud computing intersects with other disruptive technologies, indicating long-term demand for this software and products should be robust.
“Cloud spending fits in with a longer-term digital transformation trend driving tech stocks. Shifting resources and IT workloads to the cloud gives companies cost efficiencies and the benefit of being able to dynamically adjust computing as demand changes,” concluded BNP Paribas. “Given the scale and importance that cloud computing providers have in the tech ecosystem, a higher cloud spend is a welcome development for the sector.”
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