As the Dow Jones Industrial Average trades just below a record high, an index of cloud computing companies has slipped to its lowest level in six months. The 56-stock WisdomTree Cloud Computing Fund fell 2.4%, its seventh decline in the past eight days.
Sales of the technology began in February and have picked up steam over the past two weeks. The central theme of the market rotation has been concern over rising interest rates, which has traditionally hurt high growth companies, coupled with a move towards stocks that tend to outperform in times of inflation, like financials, commodities and industries.
For the year, the cloud index fell 15%, compared to the Dow’s 14% gain and the Nasdaq Composite’s 4% increase.
“Obviously, 2020 has been a phenomenal year for cloud computing companies as we entered this work-from-home economy,” said Pedro Palandrani, research analyst at Global X, manager of exchange-traded funds or AND F. “I really think there’s a misconception that as we reopen the economy we’re all going to stop using cloud computing solutions, and that’s not really true. “
In Global X’s cloud computing ETF (ticker CLOU), fund flows increased by $ 600 million last year and declined by $ 112 million this year through April, the company said.
If a downturn in cloud spending is underway, we haven’t seen it yet.
Twilio said last week that first-quarter revenue jumped 62%, beating analyst estimates. ServiceNow, whose software automates business workflows, also exceeded estimates in its most recent quarter, posting growth of 30%. However, shares of both companies fell after the reports.
Analysts attributed the drop in inventories to the second quarter forecast, which was weaker than some had expected.
“The advice had some put and take options, so we expect some investors to wait for further evidence of strengthening fundamentals before buying the shares,” Mizuho analysts wrote in a statement. note on ServiceNow. They maintained their buy rating and their price target of $ 610.
ServiceNow is down 15% this year and Twilio is down 13%. The cloud stock with the biggest decline this year is Fastly, which has lost more than half of its value after more than quadrupling last year. Fastly, which is speeding up the delivery of content to websites, also gave disappointing forecasts last week.
The other big declines in 2021 are cloud database provider Snowflake, which hosted the largest software IPO ever in September, and Coupa, a provider of expense management software. Both stocks have fallen more than 30% this year and still have one of the highest price-to-sell ratios in the cloud index.
Snowflake is expected to release its earnings later this month, while Coupa will announce them in June. Zoom is also reporting in early June and investors will be watching closely what the video conferencing company sees for the rest of 2021.
Zoom has announced three consecutive quarters of growth above 300% and is expected to say that sales have increased by more than 175% in the last fiscal quarter. From there, growth begins to drop dramatically. What business executives say they’re hearing from customers could have a big influence on the broader cloud market.
– CNBC’s Jordan Novet contributed to this report.
LOOK: What the collapsing software stock means for the market