Cloud computing stocks and the related ETFs, including the First Trust ISE Cloud Computing Index Fund (NasdaqGM: SKYY), are among the hottest technology assets this year.
More recently, SKYY and its components proved vulnerable to broader retrenchment in the technology sector, but last week’s 5.62% dip in the oldest cloud ETF could be more opportunity than a cause for concern. SKYY tracks the ISE Cloud Computing Index (CPQ) and provides exposure to multiple cloud growth stories, including Infrastructure-as-a-Service, Platform-as-a-Service, and Software-as-a-Service companies.
Although SKYY pulled back last week, the long-term thesis is intact for the ETF and cloud stocks.
“At a time when the pandemic is accelerating the global transition to cloud-based operations, government and private enterprises are scrambling to digitize and stabilize,” writes Morningstar analyst Vikram Barhat. “Apart from ensuring smooth, seamless, and secure functioning of businesses, a migration to the cloud offers a raft of other benefits including improved speed, simplified innovation, scalability, and lower risk.”
Infrastructure-as-a-Service companies provide the computing infrastructure, delivered over the internet, that enables other firms to build services more efficiently. It helps scale computing demand and avoid the high expenses and complexity of buying and managing infrastructure. About 23% of companies in the Index provide some sort of infrastructure-related services.
SKYY is primarily a large-cap fund with positions in cloud giants such as Amazon, Microsoft, Alibaba, and Alphabet, among others. Data confirm the allure of SKYY as a long-term bet.
“And money going into the cloud speaks volumes. Research firm IDC projects investments in cloud IT infrastructure to reach USD 69.5 billion, 54.2% of the overall IT infrastructure spend, in 2020,” according to Barhat. “Longer-term, it forecasts this spending to reach USD 105.6 billion in 2024, growing 9.6% annually. Further, the worldwide public cloud services market is poised to jump 17% in 2020, clocking USD 266.4 billion, up from USD 227.8 billion in 2019, according to IT research firm Gartner.”
The cloud computing industry that was estimated to be worth $188 billion in 2018 is expected to be worth over $300 billion by 2022, a nearly 15% annualized growth rate. New Dow component Salesforce (NYSE: CRM) is one of the SKYY components positioned for long-term growth.
“The company will benefit further from cross-selling among its clouds, upselling more robust features within product lines, pricing actions, and international growth,” according to Morningstar.
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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.