Cloud Computing: Are Share Prices Heading Toward Zero, or Is It an Opportunity to Buy? – ETF Trends

By Christopher Gannatti, CFAGlobal Head of Research

Thedrawdownin manystocksfocused on cloud computing software has been, in a word, unbelievable. In basically one months time, from April 11 through May 11, theBVP Nasdaq Emerging Cloud Index (EMCLOUD)a group of cloud-oriented companieshas lost roughly 30% of its value.

In figure 1, we see:

Figure 1: The Drawdown in Cloud Computing Share Prices Has Been INTENSE

Knowing this, the primary question comes back to the following, which we can simplify into two outcomes:

Company Results Support Outcome #2 over Outcome #1

While we are never able to view the future with certainty, the evidence that we can interpret today would tend to indicate that outcome #2 has a higher probability of becoming true.

The big players are still growingFAST.

One of the risks we monitor in cloud computing regards the biggest players shifting from engines of growth to something more like utilitiesthe concept being that everyone able to adopt cloud computing has done so, so the future growth stabilizes.

M&AActivity Is Still Active

While it is true that not every cloud-focused company is involved in M&A, even amidst the share price performance turmoil of 2022, companies are still active.

Cloud Computing Stocks Are Still Delivering Elevated Growth Rates

Conclusion: The Cloud Business Model Is Still Robust Amid Substantial Lowering of Equity Valuations

Some of us might have thought that there has been so much discussion about Westerncentral banksshifting policy from extremely easy to extremely focused on mitigating the risk of runawayinflationthat this must have been priced into equity markets. The recent behavior of software-oriented cloud computing companies would tell us something differentadjustments are clearly still being made. Our bottom line is thisthese subscription-oriented businesses are still largely growing their revenues, even if that growth is nowhere near what would have been seen during the pandemic period in 2020. Those with a time horizon of the next few months may have an extremely uncertain outcome. Those with a time horizon in the range of 5, 7 or 10 yearsas long as the cloud business model continues to find favormay see this downdraft as an interesting opportunity.

Originally published on June 3, 2022 by WisdomTree

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Cloud Computing: Are Share Prices Heading Toward Zero, or Is It an Opportunity to Buy? - ETF Trends