At the start of the year InvestorPlace writers were asked to pick an exchange-traded fund we thought could leap ahead in 2020.
As a lifetime technology reporter, my choice was obvious. I chose the Global X Cloud Computing Fund (NASDAQ:CLOU) to be one of the best ETFs to buy this year.
So far, so good.
For the year CLOU is up over 36%. Even at the bottom of the pandemic lockdown, it was down just 19%. Over the last three months it has gained 60%.
There are good reasons for this. The top holdings are Twilio (NYSE:TWLO), which is up 119%, Zoom Video (NASDAQ:ZM), up 271%, Zscaler (NASDAQ:ZS), up 137%, Coupa Software (NASDAQ:COUP), up 79%, and Shopify (NYSE:SHOP), up 129%.
Behind a line like this, anyone could look like Patrick Mahomes.
Stay at Home With CLOU
Even without the pandemic, companies that sell software-based services through scaled, cheap and ubiquitous clouds would have been good investments. But the pandemic has forced companies that need to save money and get work done at home into clouds. The money has rained down.
Zoom Video is the best-known of these “stay at home” stocks. Their online videoconferencing tool has already become a generic saying. Say “I’ve got to zoom,” or “We’re zooming in an hour” and people understand the meaning.
Zoom only came public in April 2019. Analysts were shocked that the first trades went off at $65. In December, the stock was revisiting that price, but it opened June 24 at $254. The idea of free, multi-person video conferences, launched by an app, quickly blew past older solutions from Cisco Systems (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT) and even Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The videoconferencing market grew 17% year over year in the first quarter, according to Synergy Research, and all the growth came from Zoom.
Zoom is a customer-facing solution everyone understands. Zscaler, on the other hand, is a cloud security company best known to system engineers. It came public in March 2018 and traded at about $47 per share at the start of the year. It opened June 24 at about $110.
Zscaler calls what it offers “zero trust security,” the concept being to authorize every user and every program on a network. Instead of treating a corporate network as a castle, and security as a moat, zero trust puts everyone and everything through a security screen. Zscaler is using its stock wealth to go on an acquisition binge, and recently raised $1 billion in the form of convertible bonds that pay just 0.125%.
Keeping the Gains
Will all the gains of the pandemic remain once it has passed?
It depends on whether companies like Shopify can turn the enabling of small online shops into serious businesses.
I called Shopify a bubble for many months, but finally gave up in February. This was after its report for the December quarter beat estimates and the shares topped $500. They open June 24 at $911.
Shopify revenues continued to grow at 50%, year over year, in the March quarter. When companies grow that fast, forget earnings and look at cash flow. Shopify’s cash grew by $319 million in the first quarter.
Why CLOU Is Still One of the Best ETFs
I continue to maintain that Shopify is a bubble and that’s true generally for the stocks CLOU holds. But until the bubble pops, you ride it.
Cloud stocks are generally overvalued. Paycom Software (NYSE:PAYC), a payroll management company that’s in CLOU, has a market cap of $19.3 billion. Only the most optimistic analyst thinks it can reach $1 billion in sales for 2020.
But unlike the dot-com bubble that popped in 2000, there’s some there here. Cloud applications do save money and create new money-making opportunities for users. Cloud applications let small groups sound like scaled enterprises, standing on the shoulders of trillions in investment.
Even after the bubble pops, in other words, there will be value in CLOU.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT.