Market Overview

Why This Cloud ETF Could Work

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Why This Cloud ETF Could Work

The universe of cloud computing exchange traded funds expanded in significant fashion with the WisdomTree Cloud Computing Fund (NASDAQ: WCLD) being one of the newest additions to the group following its September launch.

WCLD, which follows the BVP Nasdaq Emerging Cloud Index, holds 48 stocks and although the fund is equally weighted, it features robust exposure to coveted software as a service (SaaS) space.

“Software companies and their shareholders tend to particularly align in support of the SaaS subscription-based revenue model,” WisdomTree said in a recent note. “While traditional software companies derive revenue from single, large and upfront transactions, cloud SaaS companies employ a recurring revenue model with smaller and more frequent transactions. The SaaS model is preferred, which can result in a more predictable, annuity-like revenue stream.”

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Why It's Important

SaaS became something of a battleground last year as investors fretted over frothy valuations, but that situation ameliorated itself quickly as technology's rising tide seeming lifted all of the sector's boats. As such, WCLD has returned almost 9% since inception.

As 2020 moves along, consolidation in the SaaS space could take shape, which could potentially benefit WCLD as many of its holdings are easily digestible for larger software makers that need to bolster their cloud footprints.

“Meanwhile, the intensifying competition within the Software & Services industry has driven consolidation among SaaS providers, as well as private takeouts,” notes WisdomTree. “As evidenced by M&A activity within the BVP Nasdaq Emerging Cloud Index (EMCLOUD), SaaS companies have been acquired by traditional software companies, cloud peers and private equity firms at premium valuations.”

Sine WCLD's index debuted in October 2018, 11 of its components have been involved in mergers and acquisitions activity with nine being targets.

What's Next

Pivotal to the WCLD thesis for this year and beyond is the ability of SaaS to deliver on or exceed what are some already lofty growth expectations. History isn't guaranteed to repeat, but WCLD components have shown an ability to meet and exceed revenue forecasts.

“Consensus sales growth estimates for cloud SaaS companies are consistently double those of traditional non-cloud software companies; the average sales growth expectation for cloud has been ~25% as compared to ~12% for traditional software,” according to WisdomTree. “More importantly, reported sales growth for cloud companies has exceeded consensus forecasts at a wider margin than non-cloud companies.”

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