Generally speaking, when someone wants to know about the health and potential upside of a certain industry, they will conduct comprehensive due diligence on various stock performances within the specific niche in question. It is no different when it comes to the cloud computing market. Investors will thoroughly analyze the books of both pure play (Salesforce, etc.) and non-pure play (Amazon, Google, etc.) cloud stocks while reading through the lines of research assessments on expected future growth. That said, historically speaking, when a certain segment has been consistently on the rise year over year and research analysts see nothing but positive growth ahead for years to come, the respective stocks tend to explode and offer extremely generous returns to investors. Such is the case with the cloud market – historical growth and projected enormous future growth, yet minus stock growth.
Investors have been struggling to understand the market movement within the cloud segment. On top of the fact that the cloud has seen strong annual growth for the past several years, the outlook for the next decade is exceptionally promising, particularly with the rise of the Internet of Things. Yet, with the exception of only a very small handful of cloud stocks, both pure play and non-pure play cloud stocks are either stagnant or trending downward. We strongly recommend anyone with a remote interest in investing and cloud computing to look into this and conduct the research themselves. What you will find is a confusing picture, at best.
On the Surface
ETFs are generally great macro-level tools because they are comprised of top companies within a given sector. Many investors will look at ETFs to determine the performance of a certain industry. For example, investors wanting to understand the overall health of the market will look at the pattern of the S&P 500 Index. This index is comprised of some of the largest companies in the world. If it trends up, in general, this means the market is in good shape (and vice versa). So, where do cloud and stock market enthusiasts like you look? Well, luckily enough, there is a cloud computing ETF called: SKYY. On the surface, it seems like cloud investors should be jumping for joy. Heck, ALL investors should be flocking to purchase into this ETF. The cloud market sees double digit annual growth, and has seen this for the past several years. Analysts expect this to continue well into the future. And with the emergence of the Internet of Things? It is possible the overall cloud market grows, at least, 50% each year over the next 5-10 years (once IoT is commercialized and ‘released’ to the public).
Bullish Signals Everywhere
Unfortunately, once you get past the initial excitement and start to conduct your due diligence, you will see that an investment in SKYY is not all that attractive. It is true that since its inception roughly five years ago, it has climbed about 52% (i.e. ~10%/year). However, it is important to note that over the past seven years, the market has seen one of the best bull runs in the history of the market. Seemingly every stock has performed well over this period. SKYY is no outlier in this instance. More importantly, the cloud market has seen better growth than almost any other industry in the world. Yet, here we are – staring at 10% annual gains. As an investor, you would have been better off buying the S&P 500 Index over the past five years. And while the S&P 500 is made up of some of the largest companies in the world, it should be no match for the cloud – one of the fastest, if not the fastest, growth sector of all. So, what gives?
Tech, Not Cloud
The SKYY ETF is flawed and potential ‘cloud investors’ should be wary about putting their money in it. If you take a look at the makeup of this ETF, you will see that it is comprised of many large tech companies (such as Facebook, Amazon, IBM, Microsoft, etc.). The majority of the companies that make up SKYY are tech conglomerates, not pure-play cloud businesses. In fact, there are only a handful of cloud-only companies within SKYY (Salesforce, VWMare, etc.). This adds a lot of unnecessary uncertainty to SKYY. Companies like IBM for example have dozens of business units in operation; the cloud is only one of many sectors. IBM has seen explosive growth with regard to their cloud business but the majority of their other businesses have been failing. Hence, we have seen a 10% drop in price per share from one year ago. This is also the case for many other tech companies within SKYY. Now look at Salesforce (NYSE: CRM). They are up 15% year over year. There is a similar growth pattern for most of the other pure-play cloud companies listed on SKYY.
SKYY is one of the first major cloud computing indexes available for trading on the open market. But due to its comprising nature of tech (rather than cloud-only) stocks, SKYY will likely only deliver limited and mediocre returns to its investors. With the growth of cloud computing expected to increase exponentially, it is a shame that SKYY will only go as far as the tech world brings it.