PCOR - CLOU ETF: Betting On Cloud Growth

2023-10-19 11:25:41 ET

Summary

• Global X Cloud Computing ETF invests in companies benefiting from cloud computing technology.
• Top holdings include Zscaler, Qualys, and Dropbox, with strong revenue growth and stock performance.
• CLOU has returned 16% over the past year but underperformed the Nasdaq Index, with potential risks in the cloud sector.

Overview

Global X Cloud Computing ETF (CLOU) is an exchange-traded fund that aims to invest in companies that stand to benefit from the increased adoption and proliferation of cloud computing technology. This includes companies whose principal business involves offering computing Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), Infrastructure-as-a-Service (IaaS), managed server storage space, and data center real estate investment trusts.

The ETF typically holds stocks from various segments related to cloud computing. This might encompass direct service providers or those that deliver the platform, infrastructure, or software services on a subscription basis, companies that provide the necessary hardware and infrastructure for cloud computing, and data centers and related REITs fundamental to data storage.

CLOU has an expense ratio of 0.68%, representing the annual costs when investing in the ETF. Its assets under management ((AUM)) stand at $515 million. The ETF currently includes 37 holdings, with its top 10 holdings making up 46%. The ETF invests primarily in U.S. companies, as the United States holds the majority at 95.83%, followed by Sweden at 2.42%, and Mainland China with a smaller portion at 0.73%.

Holdings

Zscaler (ZS): The global cloud security firm focuses on ensuring safe access to external apps, encompassing SaaS applications and online destinations. The company's stock has risen by 15% compared to the previous year, with its 2023 revenue surging by 48% to reach $1.6 billion. Additionally, its Free Cash Flow ((FCF)) for Fiscal 2023 increased to $333.6 million, up from $231.3 million in Fiscal 2022.

Qualys (QLYS): Qualys is a cybersecurity company that specializes in cloud-based security and compliance solutions. The company offers a wide range of solutions, including vulnerability management, policy compliance, web application scanning, malware detection, and more. Qualys' latest earnings report for the second quarter of 2023 showed a 14% increase in revenues, reaching $137.2 million. Shares are up over 20% year-over-year (YoY).

Dropbox (DBX): Dropbox is a cloud storage and collaboration platform that offers file synchronization, cloud storage, and client software. It allows users to store and share files, collaborate on documents, and access files from various devices. In Q2 2023, Dropbox reported a total revenue of $622.5 million, marking an 8.7% rise from the previous year. If evaluated on a constant currency basis, the annual growth would have been 11.2%. Shares are up 33% YoY.

Performance & Valuations

CLOU returned 16% over the past year, as many growth and technology stocks saw a rebound amidst AI growth hopes as well as cooling inflation, paving the way for lower interest rates in the future. However, it notably underperformed the Nasdaq Index, as mega-cap tech names such as Microsoft (MSFT), Alphabet (GOOGL) and Meta Platforms (META) surged over the past year. Here, the Nasdaq Index, as represented by the Invesco QQQ Trust ( QQQ ) more than doubled CLOU's Performance over the past year, returning 34% YoY.

Nevertheless, the ETF outperformed competing WisdomTree Cloud Computing Fund (WCLD) , which tracks an index of cloud companies , focusing on firms primarily involved in software or services delivered via the cloud. The ETF shares some holdings such as Zscaler and Qualys, yet places a higher weight on companies such as CrowdStrike (CRWD) and Elastic (ESTC). The ETF has a slightly lower expense ratio of 0.45%. However, CLOU underperformed another Cloud ETF, namely First Trust Cloud Computing ETF (SKYY) , which was one of the first ETFs to focus on the cloud computing niche, SKYY tracks an index of infrastructure, platform, and software cloud companies. SKYY concentrates on large and established companies such as Microsoft and Alphabet, which as briefly mentioned before, outperformed the broader market. It has a comparable expense ratio of 0.60%.

In terms of the valuations of holdings in Global X Cloud Computing ETF, the ETF encompasses both mature businesses with stable cash flows such as Dropbox and Workday (WDAY), as well as high-growth companies such as Zscaler and Procore Technologies (PCOR). In this regard, slower-growth companies such as Dropbox trade at a cheaper valuation of just 13 times Price to FCF, while Zscaler demands a much higher valuation of 74 times FCF. Nevertheless, I believe the ETF offers a healthy balance between high growth and value plays such as Dropbox.

Takeaways

The Global X Cloud Computing ETF provides investors with a diversified gateway to tap into the rapidly expanding cloud industry, which is reshaping numerous sectors. Nevertheless, investing in CLOU comes with inherent risks, including sector concentration risk, as a downturn in the cloud computing industry could adversely affect the entire ETF. There's also the risk of volatility, given the fast-paced nature of tech innovations and competition. Additionally, geopolitical risks, regulatory changes, or data security breaches can impact companies in the cloud sector.

While CLOU captures the essence of the cloud's growth potential, caution is advised. Some of CLOU's holdings possess high valuations, and its expense ratio leans toward the higher end. Thus, in my opinion, for investors looking to capitalize on broader technology trends, low-expense ETFs such as the QQQ might offer a more comprehensive approach.

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