ETF Overview <\/p>\n
First Trust Cloud Computing ETF (SKYY) owns a portfolio of cloud-services stocks in the United States. The fund seeks to track the ISE CTA Cloud Computing Index. Besides a long-term secular growth trend, these stocks should benefit in the near-term from the outbreak of COVID-19 as more and more people use cloud-related services from home. Stocks in SKYY's portfolio are trading at valuations below their historical averages. Therefore, we think investors may want to take this opportunity to add more shares.<\/p>\n
Data by YCharts<\/p>\n
SKYY's portfolio includes high quality companies<\/p>\n
SKYY's top-10 holdings are mostly high-profile companies around the world. As can be seen from the table below, these top 10 stocks represent about 41.7% of its total portfolio.<\/p>\n
Morningstar Moat Status<\/p>\n
Financial Health Rating<\/p>\n
% of ETF<\/p>\n
Amazon (AMZN)<\/p>\n
Wide<\/p>\n
Strong<\/p>\n
5.40%<\/p>\n
Microsoft (MSFT)<\/p>\n
Wide<\/p>\n
Strong<\/p>\n
5.20%<\/p>\n
Oracle (ORCL)<\/p>\n
Wide<\/p>\n
Moderate<\/p>\n
4.49%<\/p>\n
Alphabet Inc. Class A (GOOGL)<\/p>\n
Wide<\/p>\n
Strong<\/p>\n
4.34%<\/p>\n
Citrix Systems (CTXS)<\/p>\n
Narrow<\/p>\n
Strong<\/p>\n
4.27%<\/p>\n
Alibaba Group (BABA)<\/p>\n
Wide<\/p>\n
Moderate<\/p>\n
3.99%<\/p>\n
VMware (VMW)<\/p>\n
Narrow<\/p>\n
Moderate<\/p>\n
3.85%<\/p>\n
Akamai Technologies (AKAM)<\/p>\n
None<\/p>\n
Strong<\/p>\n
3.61%<\/p>\n
MongoDB (MDB)<\/p>\n
N\/A<\/p>\n
N\/A<\/p>\n
3.55%<\/p>\n
Cisco (CSCO)<\/p>\n
Narrow<\/p>\n
Strong<\/p>\n
2.97%<\/p>\n
Total:<\/p>\n
41.67%<\/p>\n
Source: Created by author<\/p>\n
Most of these stocks have products or services that are not easy for its competitors to replicate. In some cases, they operate in oligopoly as well. For example, Amazon, Microsoft, Google, and Alibaba together hold roughly 61.4% of total worldwide cloud market share in Q4 2019 (see chart below).<\/p>\n<\/p>\n
Source: Parkmycloud.com<\/p>\n
Besides having a sizable market share in the cloud market, these stocks also offer other services to continue to attract subscribers. For example, Microsoft's Office 365 subscription service provides a stable and predictable income as it is difficult for its customers to switch due to compatibility and familiarity issues. Similarly, Google also provides a suite of cloud services (Gmail, Google Drive, etc.) to its customers. Likewise, Amazon offers video services and quick delivery services to its Prime members.<\/p>\n
COVID-19 is driving significant demand for cloud-based services<\/p>\n
SKYY invests in companies that provide cloud-based services to their customers. This sector should experience strong revenue growth in the next few years. In fact, a report published by Gartner late in 2019 points to significant growth opportunities in the next few years. As stated by Gartner,<\/p>\n
The cloud managed service landscape is becoming increasingly sophisticated and competitive. In fact, by 2022, up to 60% of organizations will use an external service provider's cloud managed service offering, which is double the percentage of organizations from 2018.<\/p>\n
As can be seen from the table below, worldwide public cloud services revenue is expected to jump from $227.8 billion in 2019 to $354.6 billion in 2022. This represents a growth rate of 55.7% from 2019.<\/p>\n<\/p>\n
Source: Gartner<\/p>\n
This growth rate will likely accelerate further due to the COVID-19 pandemic. Since the outbreak of COVID-19 and the implementation of social distancing, many people are forced to work from home or stay at home. Therefore, the need to do their everyday activities (work, shopping, entertainments) online is increasing sharply. In fact, SKYY's second largest holding Microsoft has seen 775% increase in demand for its cloud services in regions enforcing social distancing. Its largest holding Amazon is also seeing overwhelming influx in orders. Cisco's Webex video conferencing app drew record 324 million users in March. The app usage grew by 2.5 times in Americas, 4 times in Europe and 3.5 times in Asia.<\/p>\n
SKYY is now undervalued<\/p>\n
Now, let us take a look at its top-10 holdings and compare these stocks' forward P\/E ratio with its 5-year average P\/E. As can be seen from the table below, these stocks' weighted average forward P\/E ratio of 23.75x is much lower than the 5-year average of 28.87x. Given these stocks' strong growth outlook, we think its shares are trading at a significant discount.<\/p>\n
Forward P\/E<\/p>\n
5-year Average P\/E<\/p>\n
% of ETF<\/p>\n
Amazon<\/p>\n
64.52<\/p>\n
85.85<\/p>\n
5.40%<\/p>\n
Microsoft<\/p>\n
24.69<\/p>\n
22.36<\/p>\n
5.20%<\/p>\n
Oracle<\/p>\n
11.79<\/p>\n
14.57<\/p>\n
4.49%<\/p>\n
Alphabet Inc. Class A<\/p>\n
20.08<\/p>\n
22.72<\/p>\n
4.34%<\/p>\n
Citrix Systems<\/p>\n
6.08<\/p>\n
12.82<\/p>\n
4.27%<\/p>\n
Alibaba Group<\/p>\n
22.03<\/p>\n
27.28<\/p>\n
3.99%<\/p>\n
VMware<\/p>\n
17.86<\/p>\n
20.25<\/p>\n
3.85%<\/p>\n
Akamai Technologies<\/p>\n
19.57<\/p>\n
20.45<\/p>\n
3.61%<\/p>\n
MongoDB<\/p>\n
<\/p>\n
Go here to read the rest:<\/p>\n
First Trust Cloud Computing ETF Should Benefit From Near-Term Surge In Demand Due To COVID-19 - Seeking Alpha<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" ETF Overview First Trust Cloud Computing ETF (SKYY) owns a portfolio of cloud-services stocks in the United States. The fund seeks to track the ISE CTA Cloud Computing Index. Continue reading