By Philip van Doorn
U.S. investors remain bullish, despite rumblings out of China and the spike in delta variant infections.
Cloud companies — those at the forefront of the shift in computing power to distributed models over the internet — are expected to grow at a rapid clip over the next several years, and four of the five largest exchange traded funds covering the space are close to hitting record highs.
Below is a screen of stocks held by those ETFs, showing which are expected to increase their sales the most through 2023. In an industry with many players at relatively early stages, increases in sales, rather than in earnings, might be the best driver of stock prices.
To begin the screen, we looked at the five largest cloud ETFs:
|ETF||Assets ($bil)||Expense ratio||Holdings||Strategy|
|First Trust Dow Jones Internet Index Fund /zigman2/quotes/200286380/composite FDN||$10.8||0.51%||42||Tracks a market cap-weighted index of largest U.S. internet companies.|
|First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY||$6.3||0.60%||65||Tracks an index of cloud companies, with holdings capped at 4.5%.|
|ARK Next Generation Internet ETF /zigman2/quotes/201846852/composite ARKW||$5.8||0.79%||46||Actively managed, holding shares of “companies its managers have identified as benefiting from an infrastructure shift away from hardware and software toward cloud and mobile,” according to FactSet.|
|Global X Cloud Computing ETF /zigman2/quotes/211334933/composite CLOU||$1.4||0.68%||36||Tracks a market cap-weighted global index of companies involved in cloud computing.|
|WisdomTree Cloud Computing Fund /zigman2/quotes/214057201/composite WCLD||$1.3||0.45%||57||Tracks an equal-weighted index of U.S. companies primarily focused on cloud software and services.|
ETFs might be your best way to take a broad approach for a long-term play on the cloud revolution. If you are interested in any ETF, you should review the fund manager’s website.
Here’s a comparison of total returns through Aug. 4, along with those for the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.05% and the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ -0.34% (which tracks the Nasdaq-100 Index /zigman2/quotes/210598364/realtime NDX -0.35% ) for comparison:
|ETF||Total return – 2021||Total return – 2020||Total return – 3 years||Total return – 5 years||Total return – 10 years|
|First Trust Dow Jones Internet Index Fund /zigman2/quotes/200286380/composite FDN||15%||53%||76%||213%||646%|
|First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY||12%||58%||99%||233%||526%|
|ARK Next Generation Internet ETF /zigman2/quotes/201846852/composite ARKW||3%||157%||206%||620%||N/A|
|Global X Cloud Computing ETF /zigman2/quotes/211334933/composite CLOU||4%||77%||N/A||N/A||N/A|
|WisdomTree Cloud Computing Fund /zigman2/quotes/214057201/composite WCLD||9%||110%||N/A||N/A||N/A|
|SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY||18%||18%||63%||123%||344%|
|Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ||17%||49%||109%||231%||650%|
The ETFs’ approaches differ. For example, the ARK Next Generation Internet ETF /zigman2/quotes/201846852/composite ARKW -1.18% is the only one that is actively managed. The others track an index. It is also the only one that holds shares of Tesla Inc. /zigman2/quotes/203558040/composite TSLA +1.29% , which makes up 10.65% of the portfolio, according to information posted by ARK Invest on Aug. 5. Tesla is an electric-vehicle manufacturer, but it can also be considered a cloud company because it distributes software updates over the internet continually, and offers other cloud-based services.
Another holding unique to ARKW among the five cloud ETFs is Walt Disney Co. /zigman2/quotes/203410047/composite DIS -0.79% , which is certainly an important cloud player through its Disney+ streaming service, even if the company doesn’t say directly how much of its sales are derived from that rapidly growing segment.
As part of its description of ARKW, FactSet says the following:
“Broadly speaking, the ARKW’s managers appear focused on big buzzwords such as Internet of Things, cloud computing, digital currencies and wearable technology. While the fund’s focus may be appealing for investors with conviction in these new technologies, portfolio implementation is a more difficult task: Most of the companies developing these advancements are huge corporations for which nascent technologies are only a small fraction of total revenues. As such, it’s very difficult to get pure-play access to ARKW’s targeted technologies — so be sure to confirm that the fund’s holdings — not just its thesis — align with your view of the space.”
Together, the five cloud ETFs listed above hold 147 stocks. To project sales growth through 2023, we used calendar 2020 sales estimates as a baseline and then looked at consensus estimates among analysts polled by FactSet for the subsequent three years, if available. (The 2020 numbers are estimates, because many companies’ fiscal years don’t match the calendar.)
To make sure we had a solid set of estimates, we confined the group to the 126 companies covered by at least five analysts polled by FactSet, for which consensus sales estimates for calendar 2020 through calendar 2023 are available.
Here are the 20 companies projected to have the highest compound annual growth rates (CAGR) for sales through calendar 2023:
|Company||Country||Est. sales – 2020||Est. sales – 2021||Est. sales – 2022||Est. sales – 2023||Projected three-year sales CAGR||Held by|
|Coinbase Global Inc. Class A /zigman2/quotes/225893452/composite COIN||U.S.||$1,277||$6,159||$5,629||$6,880||75.3%||ARKW|
|LendingClub Corp. /zigman2/quotes/202691252/composite LC||U.S.||$315||$748||$1,064||$1,251||58.4%||ARKW|
|Sea Ltd. ADR Class A /zigman2/quotes/202797958/composite SE||Singapore||$4,376||$8,577||$12,494||$16,359||55.2%||ARKW|
|Pinduoduo Inc. ADR Class A /zigman2/quotes/208876581/composite PDD||China||$9,096||$17,850||$25,008||$32,624||53.1%||ARKW|
|Snap Inc. Class A /zigman2/quotes/205087158/composite SNAP||U.S.||$2,507||$4,182||$6,174||$8,894||52.5%||FDN, ARKW|
|Kingsoft Cloud Holdings Ltd. ADR /zigman2/quotes/217977560/composite KC||China||$1,010||$1,526||$2,326||$3,515||51.5%||SKY|
|DraftKings Inc. Class A /zigman2/quotes/213120645/composite DKNG||U.S.||$639||$1,173||$1,625||$2,219||51.4%||ARKW|
|Zillow Group Inc. Class A /zigman2/quotes/205077794/composite ZG||U.S.||$3,340||$5,536||$7,953||$11,566||51.3%||FDN|
|Zillow Group Inc. Class C /zigman2/quotes/204413973/composite Z||U.S.||$3,340||$5,536||$7,953||$11,566||51.3%||FDN, ARKW|
|Skillz Inc. Class A /zigman2/quotes/216943028/composite SKLZ||U.S.||$230||$387||$554||$734||47.2%||ARKW|
|Teladoc Health Inc. /zigman2/quotes/207420252/composite TDOC||U.S.||$1,094||$2,012||$2,597||$3,292||44.4%||FDN, ARKW|
|MercadoLibre Inc. /zigman2/quotes/200678442/composite MELI||Argentina||$3,972||$6,676||$9,043||$11,877||44.1%||ARKW|
|Roku Inc. Class A /zigman2/quotes/205087179/composite ROKU||U.S.||$1,778||$2,819||$3,888||$5,164||42.7%||ARKW|
|Shopify Inc. Class A /zigman2/quotes/209033712/composite SHOP||Canada||$2,929||$4,617||$6,223||$8,447||42.3%||SKY, ARKW, CLOU, WCLD|
|CrowdStrike Holdings Inc. Class A /zigman2/quotes/212513426/composite CRWD||U.S.||$841||$1,321||$1,807||$2,388||41.6%||SKY, WCLD|
|Veracyte Inc. /zigman2/quotes/201957513/composite VCYT||U.S.||$117||$204||$263||$328||40.8%||ARKW|
|Pinterest Inc. Class A /zigman2/quotes/211319641/composite PINS||U.S.||$1,693||$2,619||$3,444||$4,622||39.8%||FDN|
|Tesla Inc. /zigman2/quotes/203558040/composite TSLA||U.S.||$31,536||$50,035||$68,401||$85,143||39.2%||ARKW|
|Adyen N.V. ADR /zigman2/quotes/214279535/delayed ADYEY||Netherlands||$817||$1,142||$1,601||$2,197||39.0%||ARKW|
|Square Inc. Class A /zigman2/quotes/205989440/composite SQ||U.S.||$9,498||$18,951||$21,347||$25,077||38.2%||ARKW, WCLD|
|Okta Inc. Class A /zigman2/quotes/210420951/composite OKTA||U.S.||$814||$1,189||$1,642||$2,146||38.1%||FDN, ARKW, WCLD|
Click on the tickers for more about each company.
It is interesting to see that the list is dominated by stocks held by ARKW. The fund has a broad definition of cloud companies and is focused also on sales growth.
Here are current forward price-to-sales ratios based on consensus estimates for the next 12 months, as well as ratios of current market cap to projected 2023 sales and summaries of analysts’ opinions about the stocks.
|Company||Forward price/ sales||Price/ est. 2023 sales||Share “buy” ratings||Closing price – Aug. 4||Consensus price target||Implied 12-month upside potential|
|Coinbase Global Inc. Class A /zigman2/quotes/225893452/composite COIN||9.0||5.0||76%||$244.36||$377.89||55%|
|LendingClub Corp. /zigman2/quotes/202691252/composite LC||2.8||2.1||20%||$27.56||$24.90||-10%|
|Sea Ltd. ADR Class A /zigman2/quotes/202797958/composite SE||17.0||6.7||95%||$293.51||$312.10||6%|
|Pinduoduo Inc. ADR Class A /zigman2/quotes/208876581/composite PDD||5.6||3.4||72%||$89.28||$162.44||82%|
|Snap Inc. Class A /zigman2/quotes/205087158/composite SNAP||24.3||11.5||67%||$76.90||$85.17||11%|
|Kingsoft Cloud Holdings Ltd. ADR /zigman2/quotes/217977560/composite KC||3.8||1.8||93%||$28.91||$48.86||69%|
|DraftKings Inc. Class A /zigman2/quotes/213120645/composite DKNG||31.6||8.8||67%||$48.67||$69.52||43%|
|Zillow Group Inc. Class A /zigman2/quotes/205077794/composite ZG||4.5||0.6||64%||$110.43||$180.21||63%|
|Zillow Group Inc. Class C /zigman2/quotes/204413973/composite Z||4.5||1.7||63%||$109.23||$177.44||62%|
|Skillz Inc. Class A /zigman2/quotes/216943028/composite SKLZ||10.3||5.5||57%||$12.14||$19.86||64%|
|Teladoc Health Inc. /zigman2/quotes/207420252/composite TDOC||10.2||7.2||55%||$149.73||$199.26||33%|
|MercadoLibre Inc. /zigman2/quotes/200678442/composite MELI||11.4||6.6||78%||$1,570.00||$2,065.37||32%|
|Roku Inc. Class A /zigman2/quotes/205087179/composite ROKU||16.0||9.4||75%||$420.32||$481.43||15%|
|Shopify Inc. Class A /zigman2/quotes/209033712/composite SHOP||36.9||20.8||56%||$1,555.52||$1,718.24||10%|
|CrowdStrike Holdings Inc. Class A /zigman2/quotes/212513426/composite CRWD||40.2||22.0||91%||$264.21||$274.23||4%|
|Veracyte Inc. /zigman2/quotes/201957513/composite VCYT||13.1||10.0||78%||$46.34||$64.14||38%|
|Pinterest Inc. Class A /zigman2/quotes/211319641/composite PINS||13.5||7.2||50%||$60.13||$72.09||20%|
|Tesla Inc. /zigman2/quotes/203558040/composite TSLA||11.5||8.3||43%||$710.92||$698.94||-2%|
|Adyen N.V. ADR /zigman2/quotes/214279535/delayed ADYEY||N/A||38.3||45%||$55.20||$52.35||-5%|
|Square Inc. Class A /zigman2/quotes/205989440/composite SQ||6.8||4.2||63%||$266.42||$299.39||12%|
|Okta Inc. Class A /zigman2/quotes/210420951/composite OKTA||24.4||14.4||65%||$247.38||$275.43||11%|
In comparison, the forward price-to-sales ratio for SPY is 2.8, with a price/2023 estimated sales ratio of 2.6. For QQQ, the current P/S is 4.7, declining to 4.3 for 2023.