Jeff Lawson, CEO of Twilio
Scott Mlyn | CNBC
The rotation of tech stocks continues to hit cloud companies hardest as investors sell out last year’s best performers.
While the Dow Jones Industrial Average was trading just below a record high, an index of cloud computing companies fell to its lowest level in six months. The WisdomTree Cloud Computing Fund, which is comprised of 56 stocks, fell 2.4%, the seventh decline in the past eight days.
The tech sell-off began in February and has been picking up momentum in the past few weeks. The central theme of the market rotation was concerns about rising interest rates, which have traditionally hurt high-growth companies, and the shift into stocks that tend to outperform during periods of inflation, such as financials, commodities and industrials.
For the year, the Cloud Index is down 15%, compared to the Dow’s 14% surge and the Nasdaq Composite’s 4% surge.
Cloud underperformance in 2021
Cloud inventories rose sharply over the past year as the rapid and unexpected transition to remote working forced companies to adopt products that could help their employees collaborate remotely and access data stored in physical data centers. From Zoom for video chat and Twilio for text communication to cybersecurity tools from CrowdStrike and Zscaler, large companies across the company have bought new technology.
“2020 was clearly a phenomenal year for cloud computing companies as we entered the work-from-home economy,” said Pedro Palandrani, research analyst at Global X, manager of Exchange Traded Funds or ETFs. “I really believe that there is a misconception that with the economy reopening, we will all stop using cloud computing solutions, and that is not really true.”
In Global X’s cloud computing ETF (ticker symbol CLOU), cash flows increased by $ 600 million last year and declined by $ 112 million this year through April.
If a slowdown in cloud spending is on the way, we don’t see it yet.
Twilio said last week that first quarter revenue was up 62%, beating analysts’ estimates. ServiceNow, whose software automates business processes, also beat estimates in the last quarter, growing 30%. However, the shares of both companies fell after the reports.
Analysts attributed the share decline to second-quarter forecasts, which were weaker than some had expected.
“Guidance had some puts and takes so we expect some investors to expect further evidence of fundamentals strengthening before buying the shares,” Mizuho analysts wrote in a note on ServiceNow. They kept their Buy recommendation and target price of $ 610.
ServiceNow is down 15% this year and Twilio is down 13%. The cloud inventory with the sharpest decline this year is Fastly, which has lost more than half of its value after more than quadrupling last year. Fastly, which accelerates the delivery of content to websites, also made a disappointing forecast last week.
Other big declines in 2021 include cloud database provider Snowflake, which carried out the largest software IPO ever in September, and Coupa, an expense management software provider. Both stocks are down over 30% this year and are still among the highest price-to-sales ratios in the cloud index.
Snowflake is expected to show profits later this month, while Coupa will announce it in June. Zoom also reports in early June, and investors will be watching closely what the video conferencing company sees for the rest of 2021.
Zoom has grown in excess of 300% for three consecutive quarters and is expected to see revenue increase in excess of 175% in the final fiscal quarter. From then on, growth begins to decline dramatically. What corporate executives say they hear from customers could have a huge impact on the broader cloud marketplace.
– CNBC’s Jordan Novet contributed to this report.
CLOCK: What the slump in software stocks means for the market