This Cloud ETF May Be Expensive, But It's Worth It

Like other cloud computing assets, the WisdomTree Cloud Computing Fund WCLD may be suffering from a case of valuation concerns, but investors may not want to exaggerate this scenario and miss out on opportunity with WCLD.

What Happened: The once scorching hot WCLD is lower by 7.71% over the past month and off 10% from its most recent high – the definition of a correction. However, closer examination of the $791 million fund indicates its components have the growth to sustain frothy multiples.

WCLD, which turned a year old a month ago, follows the BVP Nasdaq Emerging Cloud Index, a relevant point because that benchmark goes beyond cap-weighting, employing earnings and revenue growth screens that keep investors exposed to credible cloud growth.

Why It's Important: It's common for market participants to express valuation concerns when growth fare, cloud or otherwise, falter. However, WCLD's recent decline may be more call to action than a case of red flags waving.

“Valuations appear to reflect continued strength in top-line growth over at least the next 12 months. The median WCLD constituent is forecasted to deliver 20% revenue growth over the next 12 months, well above the 6% forecast for the Nasdaq 100 Index,” according to WisdomTree research. “Some may argue that the deceleration to 20% growth forecasted over the next 12 months from 30% over the trailing 12 months is a red flag, but that 10 percentage point gap between realized and forecasted growth has persisted for the last five years, perhaps because consensus estimates have proven too conservative.”

Additionally, a strong case can be made that the broader cloud computing is only beginning to scratch the surface of its total addressable market, meaning there's likely more growth and multiple expansion ahead.

What's Next: Following a recent spate of cloud initial public offerings, it's not unreasonable to expect WCLD's multiples will expand as some of these new names are added to its underlying index.

As WisdomTree notes, Bessemer tracks private cloud companies via the Cloud 100 list and this year's average valuation of $2.7 billion on that list is 60% above the 2019 average. Still, investors should fret about that. They may want to embrace it.

“As of this writing, the total market capitalization of publicly traded cloud companies, as measured by the BVP Emerging Cloud Index, stands at $1.6tn,” according to WisdomTree. “Bessemer predicts that the public cloud benchmark will have reached $2tn by the release of the 2021 Cloud 100 list.”