Cloud computing is one of the more tricky industries to pin down, investment-wise, because so many cloud companies trade at wild valuations.
But at the same time, there’s all sorts of potential for growth in the sector. Expectations for cloud computing are sky-high (sorry), and a study by the IDC pegs public IT cloud service spending to grow to nearly $130 billion by 2018, while the global cloud computing market is expected to reach $270 billion by 2020.
SaaS in particular will grow nearly five times the software market, with cloud software accounting for $1 out of every $6 spent on software.
However, considering that picking individual cloud companies can be like navigating a mine field, investors are better off investing in the sector broadly — and you can do so via the First Trust ISE Cloud Computing Index Fund (SKYY).
What You Get With SKYY
The First Trust ISE Cloud Computing Index Fund is a passive fund that merely tracks an index of companies tied to cloud computing in some way.
Some of SKYY’s holdings include so-called “pure play” cloud computing companies whose business are directly tethered to provide cloud infrastructure or other services primarily through the cloud. SKYY provides access, for instance, to the enterprise cloud computing and customer relationship management company Salesforce.com (CRM) and open source software solutions company Red Hat (RHT).
That has been a winning formula for SKYY, and not just because of the quality of its holdings.
Many big tech firms are looking to piggyback their way into the cloud computing boom, and naturally, mergers and acquisitions are one of the most common ways to go about that.
Rumors of major firms buying into the SaaS race continue to swirl around Salesforce, propelling CRM higher and catapulting the stock from SKYY’s ninth-largest holding less than a month ago to its third as of the end of May, with a weighing of almost 4%.
Potential buyers are numerous. Salesforce and Microsoft (MSFT) were in talks for an acquisition for as much as $55 billion, but MSFT didn’t pony up the $70 billion Salesforce wanted. Other potential buyers include IBM (IBM), Google (GOOG, GOOGL), Facebook (FB) and Oracle (ORCL).
Meanwhile, Alibaba (BABA) is on the prowl, and possible candidates include Red Hat, Rackspace (RAX), Akamai (AKAM) and Intuit (INTU) — all of which hold a combined weight of about 11% of SKYY’s portfolio.
What ELSE You Get With SKYY
However, investors should note this about SKYY: It only aims to invest in companies tied to cloud computing; not all of SKYY’s holdings are true cloud computing companies.
SKYY also holds companies “outside the cloud computing space but (that) provide goods and services in support of the cloud computing space. So you have Amazon (AMZN), which does have its Amazon Web Services arm, though that’s not nearly the kind of driver its legacy e-commerce site is. You also have Apple (AAPL), which is highly tethered to the cloud already and reportedly is working to become “more competitive … in cloud services.”
But then you have companies that simply use cloud computing.
Netflix (NFLX), for instance, is SKYY’s top holding with a 5% weight — but while it certainly uses cloud services to distribute its content, does it really directly benefit from an increased push by other companies into the cloud?
Still, some justify NFLX’s place in SKYY, ranking it among the most important cloud computing companies in the world. Heck, it even dedicates time to promoting cloud and open source software initiatives, cultivating an image for itself as the role model in operating a multibillion-dollar business in the public cloud.
Still, Netflix and some of SKYY’s other holdings pose a bit of a problem for investors to invest in the growth of cloud computing, given that they’re cloud users, but not really cloud providers.
Depending on your interpretation (we’ll use mine), SKYY is weighted about 30% in stocks one wouldn’t consider “cloud” plays.
Holding stocks like Apple and Netflix can be beneficial to any fund; for instance, SKYY is outperforming the Nasdaq by about 2 percentage points over the past six months — just know what you’re buying.
Also know what it costs, which isn’t much. The fund charges 0.6% in fees, or $60 annually for every $10,000 invested.Bottom Line
As more and more companies crave business agility, increased innovation and scalability to meet demand, the cloud will see increased demand — and that’s the right setup for continued gains in SKYY.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.