Cloud transformation TU IS
prologue
The world is embracing technology at a rapid pace, and over the past decade the technology sector has become the largest sector in the S&P 500 Index (SP500) with a weight of 26.3%.Cloud computing business has attracted investors from all over the world Very attractive – 50%+ CAGR – with growth traction, high gross margins and huge operating leverage.
But everything has a price. And the hawkish outlook for interest rate policy doesn’t bode well for the stock prices of these fundamentally attractive companies. This article describes my stance on stocks exposed to the subject of cloud computing.
WCLD; How to play cloud migration trends
WisdomTree Cloud Computing EFT (Nasdaq: WCLD) is intended to provide exposure to the BVP Nasdaq Emerging Cloud Index. The WCLD configuration is as follows:
Composition of WCLD ETFs
Top 5 WCLD ETFs (WCLD ETF website, author’s analysis)
Yext, Inc (YEXT), Clearwater Analytics (CWAN), Workiva (WK), Coupa Software Inc (COUP) and Smartsheet (SMAR) make up the top five stocks.
Overall, the top five holdings make up just over 10% of the overall index. Moreover, the weightings of the top five holdings are nearly even, with a standard deviation of just 0.2% in their weightings, suggesting a balanced exposure.
Key Fundamental Factors of WCLD
In today’s environment, strong corporate earnings are the most important driver for cloud computing companies. Despite their willingness to adopt the latest technology to gain a competitive edge in an increasingly digital world, businesses are cutting back or reprioritizing their spending decisions in a recessionary environment. , will delay This could reduce the growth prospects of cloud computing companies.
Declining growth prospects for high-growth companies and the increasing opportunity cost of investable capital as measured by rising interest rates are major headwinds for WCLD. In my articles for IVW here, IWY here, and IWO here, I explained my broader outlook on growth stocks.
That said, there are some mitigating factors for the downturn in growth prospects we’ve been hearing among various industry players. A cloud-based delivery model means billing for business operating costs as the customer pays at regular intervals, such as once a month, when software as a service (SaaS) is delivered. This reduces the capital investment commitments businesses need to make compared to traditional multi-year licensing models, and provides greater opt-in and opt-out flexibility for technology spending programs.
The leading indicators for me are the Federal Reserve decisions that affect interest rates and the ultimate growth indicators for the underlying cloud computing companies. We’re not too worried about margins because there’s a lot of operating leverage in these business models.
My long-term outlook for the WCLD ETF’s business remains very positive, as cloud adoption is still fairly prevalent. This industry is expected to grow at his CAGR of around 20% by 2030. But I think a lot of this long-term growth is already priced into the market. More importantly, in December 2022 he launched a hawkish stance on the Fed. As such, I currently remain neutral on WCLD fundamentals or tactical views.
To complement that fundamentals-based view, price, volume, and time-based readings are:
If you are new to hunting alpha articles using technical analysis, read this. directoruses the principles of flow, location, and traps to explain how and why to read charts.
Read relative money flow
WCLD vs SPX500 Technical Analysis (TradingView, Author’s Analysis)
A rise in the WCLD/SPX500 relative chart means that WCLD is outperforming the S&P 500 (SPY). Conversely, a downward movement means that the WCLD is below the S&P 500.
After dropping more than 60% since February 2021, the WCLD/SPX500 continues its downtrend, showing bearish lows. The place of previous support in 2020 has now become a key monthly resistance level that caps price gains.
There is currently no evidence of false breakdowns or bullish traps to join the parade of sellers. There is also no sign of a buyer holding a fort with monthly support. Therefore, I remain bearish, but currently ‘hold’ as the price is not currently in a good place to add a position.
read absolute money flow
WCLD ETF Technical Analysis (TradingView, Author’s Analysis)
Similar to the relative chart, the WCLD absolute chart also plummeted from its November 2021 peak of $65.51 before seeing a correction of more than 65%. The price has broken out of the previous support zone of $28.26 and is beginning to fall sharply. However, the support area has broken below $21.76 and if it fails to sustain this level, it may drop further.
So far, there is no clear evidence that price triggered false breakouts to indicate a sharp reversal of the trend. I think the price can fluctuate between monthly resistance and support levels.
Conclusion
Leading indicators such as corporate earnings growth, overall spending trends, and easing rate hikes will be key triggers for the WCLD to end its bearish descent, consolidate, and once again outperform the broader market. Until these developments are clarified, I will keep the WCLD rating on hold.
