Cloudy With a Chance of Profits

“No one understands the cloud, it’s a mystery”. – Jason Segel, Sex Tape (2014 Comedy)

Cloud companies are having their moment. The BVP Nasdaq Emerging Cloud Index, a performance index of emerging public cloud companies, is up over 50% in 2020. The broad technology index Nasdaq is only up 15%.

THE EXPLANATION

For consumers, the cloud stores all your documents, data, and TikToks virtually on the internet. The only downside is the constant notifications from your phone asking you to upgrade your cloud storage.

For businesses, the cloud lowers IT expenses and reduces the need to maintain servers. The business benefits of the cloud include lower cost, higher flexibility and higher security.

The cloud category includes both cloud service providers (e.g. Microsoft, IBM, Dropbox) and companies that use cloud services to deliver their services (e.g. Slack, DocuSign, Zoom). Cloud companies are known to have higher growth rates, higher margins, and a subscription-based recurring revenue model. All this warrants a higher valuation for cloud companies compared to non-cloud companies.

• In 2019, the cloud market was valued at $199b and is expected to grow at an astonishing rate of 18.6% annually to $761b by 2027.

COVID pushing the cloud(s) higher

Cloud companies are flying high 💸. The work from home trend accelerated the industry and forced numerous companies to adopt cloud services overnight. As the CEO of Microsoft, Satya Nadella, put it, “We’ve seen two years of digital transformation in two months”.

• NCino ($NCNO), a tech company that helps bring banking operations onto the cloud, soared 195% the day of its IPO on July 14.
• Cloud computing stocks like Fastly ($FSLY)/Datadog ($DDOG) doubled and tripled as a result of COVID.

Cloud IPO Alert ⚠️

Rackspace Technology is a cloud company looking to IPO on the back of the cloud hype. Our friends at S-1 Club wrote an in-depth analysis of their upcoming IPO.

In 2016, Apollo management took control of the business, loaded the company with a significant amount of debt ($4b) and revamped its business model. The company is expected to go public this week under the ticker “$RXT”. The company’s high debt, competitive landscape, and self-interested, profit-maximizing owners may put some investors off.

THE ACTION

Investors can get exposure to the industry through 3 of the largest cloud ETFs:

• Global X Cloud Computing ETF ($CLOU)
• First Trust Cloud Computing ETF ($SKYY)
• WisdomTree Cloud Computing Fund ($WCLD)