WisdomTree | Aug 19, 2022 13:14
Christopher Gannatti, Global Head of Research, WisdomTree
2020 and 2021 saw investors putting record amounts of investments into thematic funds. Whilst no two thematic funds are the same, two things, in particular, were noticeable:
The result? See Figure 1…
Figure 1: Historical evolution of the enterprise value to trailing 12-month sales ratio for specified indices
Source: Bloomberg, with data shown over the live calculation, available history for each index. WisdomTree Cybersecurity started its time series on 30 October 2020; Nasdaq CTA Artificial Intelligence started its time series on 23 November 2018; BVP Nasdaq Emerging Cloud Index started its time series on 2 October 2018. Historical performance is not an indication of future performance and any investment may go down in value.
Conclusion—a signal to invest?
We wish the matter was as simple as, ‘valuation is down a certain percentage, therefore it has bottomed and it is a great time to enter’. Unfortunately, all three of the indices shown in Figure 1 could drop further from here. We can note the revenue growth of some select cloud companies, recognising that the BVP Nasdaq Emerging Cloud Index saw the largest overall drop in the EV-Sales ratio.
We are tending to see cloud computing companies guiding in the range of either stable or slightly lower growth for 2022[3]. As yet, we have not seen revenue growth ‘disasters’, but that doesn’t mean it couldn’t happen as companies continue to report.
Tobias Lütke, CEO of Shopify, wrote a letter that was posted to Shopify’s public site concerning their strategic decision to let go of around 10% of their workforce. Included, was the chart in Figure 2 which we think is illustrative of what we are seeing in a lot of the software space.
Figure 2: U.S. ecommerce adoption growth rate
Source: https://news.shopify.com/changes-to-shopifys-team
We think that ‘growth = opportunity’, but recognise that it will be critical to see central banks transitioning from aggressive tightening to slowing or pausing their tightening. A massive rally in software company share prices would be difficult to see in the face of continued 75 basis point hikes. One way to potentially manage this risk could be a longer investment horizon, where the risks associated with any singular macroeconomic environment can typically be lessened.
Disclaimer: This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
[1] Source: Bloomberg for the aggregation of quarterly earnings reporting dates.
[2] Source: Respective company investor relations website for each specified company where they post a press release and presentation reporting the most recent results.
[3] Source: Company investor relations websites, recognising that not all companies provide guidance or provide it based on the same exact metrics or time periods.
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