CLOU: Expect Rain With So Many New Cloud Companies

Harrison Schwartz profile picture
Harrison Schwartz


  • Cloud computing companies have dominated the recent technology rally as the stay-at-home lifestyle brings greater e-commerce revenue.
  • SaaS, PaaS, and other "acronym firms" have extremely high valuations today, with the Global X Cloud Computing ETF trading at a weighted-average P/E of nearly 100X.
  • There is no doubt the cloud computing industry will grow by double digits over the coming years, but growth does not necessarily mean profit growth.
  • Problematically, many firms in CLOU compete with each other and competition can be extreme with non-physical firms that lack significant moats.
  • The firms in CLOU appear to be in a bubble that recently went through a classic "blow-off top" which means their long-term peak may now be in.
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(Pexels) - Is the sun setting for Cloud Computing stocks?

Technology stocks have dominated market performance over most of 2020. Many firms such as Apple (AAPL), Google (GOOG) (GOOGL), and Microsoft (MSFT) are up 30-50% YTD despite it being an abysmal year for the global economy. However, it is actually the newer cloud computing firms that have seen the most significant gains. This includes Software-as-a-Service, Platform-as-a-Service, and Infrastructure-as-a-Service firms, as well as server and data REITs.

The Global X Cloud Computing ETF (NASDAQ:CLOU) invests in this subindustry and has seen a significant increase, rising 35% this year and 60% from its March trough. See below compared to the popular Technology Select Sector SPDR ETF (XLK):

ChartData by YCharts

The ETF has seen significant investor inflows in recent months, with its AUM doubling since May despite a slowdown to its appreciation. Let's take a closer look at this ETF and its holdings to gauge whether or not investors are buying the "Next Apple"'s or are riding the last wave of a technology bubble.

A Look at CLOU's Holdings and Valuation

The bulk of CLOU's holdings are software, with application software making up 58% of holdings and systems software 13%. This includes companies such as Zoom (ZM), Netflix (NFLX), and Coupa Software (COUP). The other major category is internet services which include the likes of Shopify (SHOP) and Zscaler (ZS).

Nearly all of the companies in CLOU have had very high momentum this year. This is particularly true for the top ten holdings in the ETF, about half of which have doubled or more this year. The performance of these ten firms is shown below:

ChartData by YCharts

With such strong performance across so many holdings in the ETF, it is no surprise many investors are flocking to it. Much of this is because

ChartData by YCharts

ChartData by YCharts

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Disclosure: I am/we are short NFLX, AAPL, CRM, SHOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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