CLOU Stock: Growth Fully Reflected in Valuations (NASDAQ: CLOU)

cloud computing concept

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investment thesis

The demand for cloud computing services increased during the COVID-19 pandemic and is unlikely to decrease as work, education, and social activities move to digital experiences. Given the great potential for technology development, cloud computing is one of the areas of focus for a number of well-established corporations and start-ups. According commercial wire, the global cloud computing industry is anticipated to grow from $445.3 billion in 2021 to $947.3 billion in 2026, at a compound annual growth rate of 16.3%, much faster than the US GDP growth rate. USA projected during the same period. Some of the main drivers of this megatrend are the propensity of organizations towards automation, the requirement to improve the customer experience, and the increased demand for remote workplaces.

In this article, I will review the Global X Cloud Computing ETF (NYSEARCH:NAIL), which invests in a basket of cloud computing companies.

Strategy Details

The Global X Cloud Computing ETF tracks the Indxx Global Cloud Computing Index. This index invests in companies positioned to benefit from the increased adoption of cloud computing technology, including companies whose core business is offering software as a service, platform as a service, and infrastructure as a service. .

If you want more information about the strategy, please Click here.

Portfolio Composition

In the sector allocation chart below, we can see that the index places a high weight on the information technology sector (accounting for around 83% of the index), followed by communication services (accounting for 8% of the index). total assets) and consumer discretionary stocks (representing about 5% of the portfolio). The three largest sectors have a combined allocation of approximately 96%. Unsurprisingly, the strategy leans towards tech stocks. These stocks generally have high betas, so I think it’s important to see if you’re comfortable with a higher level of volatility before buying CLOU.

Global X ETFs

Global X ETFs

In terms of geographical distribution, the top five countries represent 100% of the portfolio. The United States accounts for 88% of assets, while other countries such as China, which are rapidly catching up with technology, appear to be underrepresented (only a 2% allocation to China).

Global X ETFs

Global X ETFs

CLOU invests more than 38% of funds in mid-cap growth issuers, which are characterized as mid-sized companies dominated by growth characteristics. Mid-cap issuers are generally defined as companies with a market capitalization between $2 billion and $8 billion. The second largest allocation is small-cap growth equities. Unsurprisingly, CLOU allocates roughly 85% of funds to growth stocks, with a bias toward small- and mid-cap issuers.

Morning Star

Morning Star

The fund is currently invested in 34 different stocks. The top ten positions represent 51% of the portfolio, with no single stock exceeding 7%. CLOU is concentrated and a few names are likely to generate future returns. If you’re looking for more diversification, the WisdomTree Cloud Computing ETF (WCLD) is a better option, in my opinion.

Global X ETFs

Global X ETFs

Since we are dealing with stocks, an important feature is the valuation of the portfolio. According to Global X ETFs, the fund is currently trading at an average forward price-to-book ratio of 6 and an average forward price-earnings ratio of ~52. These are asset-light companies that typically earn a high return on capital, which is one of the popular explanations for high valuations. As a result, I am not surprised that CLOU is trading at more than 5 times its book value. Having said that, I think the current tightening cycle will hurt stocks with high multiples the most. At the same time, we have record inflation, which is negatively correlated with P/E ratios. In other words, when the IPC is above 5%, stocks typically trade below 15x earnings.

Crestmont Research

Crestmont Research

Is this ETF right for me?

I have compared CLOU’s price performance to the Invesco QQQ ETF (NYSEARCA:QQQ) and the WisdomTree Cloud Computing ETF over the past 2.5 years to assess which was a better investment. During that period, QQQ outperformed both cloud strategies. It is interesting to see that most of QQQ’s outperformance was due to a brutal drop in cloud stocks from Q4 2021. In my opinion, the recent drop shows some of the dangers associated with investing in cloud stocks. high multiple.

To put CLOU’s performance into perspective, a $100 investment in CLOU in its early days would now be worth ~$135.48. This represents a compound annual growth rate of ~13%, which is a good absolute return. That said, I don’t think past returns are a good indicator of future returns, especially in the case of CLOU as we are now entering a new monetary regime where liquidity will be tight.

refinitive eikon

refinitive eikon

key takeaways

In my opinion, the technology sector, particularly cloud computing, will continue to develop rapidly. CLOU provides investors with access to a portfolio of fast-growing international companies primarily focused on software and cloud services. While I am confident that cloud computing is here to stay, I think it is difficult to predict today’s winners. Additionally, cloud stocks are trading at high multiples as they enter a new monetary regime in which liquidity will be inadequate to sustain such valuations. Overall, I think patient investors will be able to buy CLOU shares cheaper in the next 12 months.

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