Despite all the hoopla surrounding technology stocks in the first half of 2024, software names struggled. In fact, some cloud computing indexes and ETFs have year-to-date losses.
Software stocks’ lethargy is a legitimate concern to investors. This comes at a time when the broader tech sector is the best-performing group in the S&P 500 this year. Add in the fact that there are clear synergies between AI and cloud computing, and those worries are amplified. Still, assets such as the WisdomTree Cloud Computing Fund (WCLD) could be emerging as credible contrarian plays.
WCLD tracks the BVP Nasdaq Emerging Cloud Index. The fund could be worth considering now. That's because market participants are placing greater emphasis on software companies’ ability to generate profits and free cash flow. Those boxes are checked by an array of WCLD holdings.
Case for Cloud Computing Stocks Still Strong
In financial markets, there are often instances of share price performance belying companies’ underlying fundamentals. Arguably, that’s the state of play today with cloud stocks and ETFs such as WCLD. As Christopher Gannatti, WisdomTree's global head of research, points out, one of the primary reasons companies subscribe to often pricy software package is to realize efficiencies. That case sees enhancement as more firms attempt to reap AI benefits.
“ChatGPT, introduced to the world in November 2022, created an entirely new impression as to what software can be used to accomplish,” observed Gannatti. “This is another variable that all software companies need to contend with. It isn’t just thinking about the value proposition of the individual software package anymore. [Now ]it’s the value proposition relative to what generative AI software either can do already or may be able to do in the near future.”
Potential Catalysts
There are other potential catalysts that could cement WCLD’s status as a contrarian. One is speculation the fourth quarter of 2023 represents the bottom in the software as a service revenue cycle. Another is the possibility the Federal Reserve will soon pare interest rates. And that would be a boon for growth companies.
“The clearest potential positive catalyst for the general ‘emerging SaaS’ company would be actual policy interest rate cuts from the U.S. Federal Reserve,” added Gannatti. “The bigger “unknown” regards how effective each of the SaaS companies will be at establishing its economic value in the face of ever-increasing capabilities from the large language models.”
Importantly, cash flow margins for WCLD member firms have surged over the past two years. That could provide some runway for investors to reconsider cloud stocks and ETFs. Less risky assets, including cash, have sported elevated yields.
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