This year, markets have seen a major shift away from growth stocks, leading to soaring valuations. Christopher Gannatti, CFA and global head of research for WisdomTree, delved into valuation trends within software-centric thematic strategies and discussed the opportunities of cloud computing as well as cybersecurity in a recent blog post.

Software-centric strategies performed well at the start of the pandemic and into 2021, delivering strong revenue growth, attracting interest and solid investment.

“As performance accelerated, valuations also increased, at least based on the value of the company relative to sales in the last 12 months (EV-Sales). This tells us that while sales were increasing, investors were increasing valuations due to their excitement about future potential,” Gannatti wrote. “Obviously the environment in 2022 has changed.”

Image sources: WisdomTree Blog

Gannatti demonstrated the valuation trends of two indices, the WisdomTree Team8 Cybersecurity Index and the BVP Nasdaq Emerging Cloud Index, two indices that provide exposure to megatrends within software.

The BVP Nasdaq Emerging Cloud Index hovered below 10x valuations between October 2018 and April 2020, rose to 12x-14x from April 2020 to November 2021, then dropped dramatically to 4x to 5x where it sits currently. Index valuations reflect both the different stages of the pandemic as well as the start of the Federal Reserve’s monetary tightening policy.

“We tend to see cloud companies heading for flat or slightly lower growth for 2022. So far, we haven’t seen any revenue growth ‘catastrophes’, but that doesn’t mean it could not happen as business continues. report (income),” Gannatti explained.

The WisdomTree Team8 Cybersecurity Index has remained highly correlated with the Cloud Computing Index since its launch, largely due to the overlap between cloud computing and cybersecurity.

Fed impact on software megatrends

“We believe growth is synonymous with opportunity, but recognize that it will be critical to see central banks move from aggressive tightening to either slowing or pausing their tightening,” Gannatti wrote. “One way to manage this risk could be a longer investment horizon, where the risks associated with a singular macroeconomic environment can be mitigated.”

While growth and technology stocks have suffered in the first half of 2022, this means that funds such as the WisdomTree Cloud Computing Fund (WCLD) and the WisdomTree Cybersecurity Fund (WCBR) are currently undervalued, providing a good entry point into the space for investors.

WCLD provides investors with pure-play exposure to companies that deliver cloud-based software and tracks the BVP Nasdaq Emerging Cloud Index, an equally-weighted index comprised of companies that derive the majority of their revenue from cloud-delivered software. This could mean remote delivery or a cloud-based business model based on subscription, transaction or volume.

WCLD offers multi-cap exposure to emerging companies in cloud software and services and has an expense ratio of 0.45%.

WCBR seeks to track the WisdomTree Team8 Cybersecurity Index, which invests globally in companies whose primary revenues are derived from cybersecurity and security-focused technologies that prevent attacks and intrusions into systems, networks , computers, apps and mobile devices.

The index also uses exclusion filters to screen companies based on ESG criteria that violate UN guidelines and global screening standards, are involved in controversial weapons (biological, chemical, cluster, nuclear or white phosphorus and anti-personnel mines), have a significant involvement in the tobacco or thermal coal business, or violate other ESG standards of the index.

WCBR has an expense ratio of 0.45%.

For more news, insights and strategy visit the Modern Alpha Channel.
Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.