Cloud Hosting

By Christopher Gannatti, CFAGlobal Head of Research

When you think aboutcloud computing companiesthis year, the most likely starting point will be performance1:

However, from June 16 to August 22 this year2:

The bottom line:The dominant force behind the performance of cloud computing companies has beenmacroeconomic, meaning that as theU.S. Federal Reserveand othercentral bankspursue more restrictive monetary policies to fightinflation, thevaluationsof cloud companies have fallen. Similarly, if investors feel that inflation is easing in any wayand subsequently, central banks may slow the pace of tighteningthere has tended to be a strong positive share price response.

The BVP Nasdaq Emerging Cloud Index: August 2022 Rebalance

We mention the BVP Nasdaq Emerging Cloud Index as a measure of the performance of cloud companies because it is designed to offer a precise exposure to cloud companies growing revenues by serving enterprise customers. What we see in figure 13:

Figure 1: Bringing the BVP Nasdaq Emerging Cloud Index Back to Equal Weight

The Fundamentals Will Matter Again

Up to this writing in August, it would be difficult for us to note that the main catalyst for the share price performance of cloud companies has to do withfundamentalslike revenue growth. As we noted earlier, the main catalyst has been the macroeconomic backdrop.

However, company fundamentals are always an important force and will always come back to prominence once macro pressures fade. What we see in figure 24:

Figure 2: Gauging the Fundamentals

Conclusion: Cloud Companies Will Continue to Deliver Exciting Results

In cloud computing, its important to look at all the available signals to gain the most appropriate sense of market conditions.

Bessemer Venture Partners has just put out its annual Cloud 100 Benchmarks report for 2022.5This report specifically looked at the largest and most dynamic private cloud companies, which provide important signals for the overall health of the business model.

In 2022, Bessemer specifically notes that the valuation of private companies may not be the best metric to look at if the goal is to get a sense of the health of a given market. For instance, if companies have not raised money recently, they may not have their valuations marked all the way to present market conditions. Bessemer instead focuses on what they call Centaurs. While a Unicorn has $1 billion in private market valuation, a Centaur has $100 million inannual recurring revenue.

For the 2022 Cloud 100, 70% are already achieving Centaur status and a further 10% more are quite close and could reasonably do it before the year is out. In an environment where the market is focusing much more on results than exciting stories and private funding is harder to come by, proving business success at the Centaur level is indeed important.

At WisdomTree, we work directly with Bessemer Venture Partners and Nasdaq to provide an investment strategy that seeks to track the returns of the BVP Nasdaq Emerging Cloud Index, theWisdomTree Cloud Computing Fund. If you are thinking it is an interesting time to learn more about the investment strategy, please visit ourcloud computingresearch.

1Source: Bloomberg, with data from 11/9/216/16/22.2Source: Bloomberg, with data from 6/16/228/22/22.3Source: The six-month period between rebalances is 2/22/228/22/22. The performance source is Bloomberg.4Sources: WisdomTree, Nasdaq and Bloomberg, with data measured as of 8/22/22. Further details in sourcing are below figure 2.5Source: DOnofrio, Teng, Schmitt, The 2022 Cloud 100 Benchmarks, Bessemer Venture Partners, 8/9/22.

Originally published by WisdomTree on August 30, 2022.

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Important Risks Related to this Article

As of August 26, 2022, WCLD held 1.33%, 1.21%, 1.35%, 1.29%, 1.26%, 1.40%, 1.41%, 1.70% and 1.45% of its weight in RingCentral, Asana, Blend Labs, Paylocity Holding Corp, Box, Qualys, Gitlab, Snowflake and SentinelOne, respectively.

Christopher Gannatti is an employee of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management, Inc.s parent company, WisdomTree Investments, Inc.

There are risks associated with investing, including the possible loss of principal. The Fund invests in cloud computing companies, which are heavily dependent on the internet and utilizing a distributed network of servers over the internet. Cloud computing companies may have limited product lines, markets, financial resources or personnel and are subject to the risks of changes in business cycles, world economic growth, technological progress and government regulation. These companies typically face intense competition and potentially rapid product obsolescence. Additionally, many cloud computing companies store sensitive consumer information and could be the target of cybersecurity attacks and other types of theft, which could have a negative impact on these companies and the Fund. Securities of cloud computing companies tend to be more volatile than securities of companies that rely less heavily on technology and, specifically, the internet. Cloud computing companies can typically engage in significant amounts of spending on research and development, and rapid changes to the field could have a material adverse effect on a companys operating results. The composition of the Index is heavily dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as intended. Please read the Funds prospectus for specific details regarding the Funds risk profile.

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