WisdomTree Cloud Computing ETF added to JIC Portfolio

WisdomTree Cloud Computing ETF (WCLD  2875p, 1.9% of JIC Portfolio and 0.0% of JIC Top 10)

I decided to gain my “Cloud Computing” exposure through this ETF.

I am thankful to Andrew Latto, (www.fundhunter.co.uk) for the research he has done on it.

This ETF tracks the BVP NASDAQ Emerging Cloud Index and is clearly focussed on growth rather than current profitability.

To gain entry to the Index a stock must have revenue growth of more than 15.0% per annum and if it drops below 7.0%, the stock is ejected.

The top 10 holdings on 31st December 2012 were:

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I am aware I use DocuSign and Adobe. Other stocks within the ETF include PayPal, Zoom, DropBox, Wix.com, Square, Salesforce.com, Slack and Shopify. All names I have used or know people who have.

The two business requirements for companies to enter the Index. 1) They must offer services through a cloud delivery model and 2) payment must be provided through a cloud economic model such as subscription-based.

This results in low distribution cost and a resilient revenue stream.

Latto uses Adobe as a case study in his write-up.

“It is the largest company in the BVP Cloud Computing index with a $190bn market value. The group used to operate through one-off sales but is now subscription-based.

Adobe was profitable before its shift to the cloud but is now set to earn a 40% profit margin on a sustainable basis. The margin had previously been volatile and averaged around 28%.

Revenue growth is forecast to be over 15% from 2020 to 2022, with free cash flow conversion close to 110%.  In other words, solid growth, high and stable margins and strong free cash flow.

Adobe’s financial model is one that other cloud computing companies aspire to. It has resulted in……

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I have gone for a High Risk/High Reward rating, pointing to a 2.0% target. High Reward for obvious reasons but High Risk because this is an investment in some well-established companies but also many that are still relatively early in their development.

Twenty eight of the fifty two companies have a free cash flow margin of more than 5.0% including ten of over 20.0%. However, nineteen companies are yet to generate positive free cash flow. They are still in the investment phase.

There is also valuation risk, with valuations looking rich, especially for the earlier phase companies. We have all heard of Zoom. Latto has it on a 2020 PE ratio of 2282x. That does fall to 159x in 2021, 135x in 2022 and 96x in 2023. It needs to continue growing very fast.

Although I can’t be accused of getting in at the ground floor, I am hopeful that we are still at floor 10 of a 95-story building.

I paid 2875p for 312 shares and it leaves me with cash of £38 and I am now at my maximum 30 positions.


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