In a more nervous market, highly valued cloud growth stocks are pulling back. And that might well create an opportunity.
After all, this has been a market where growth stocks have outperformed value stocks for years. And cloud stocks have been among the best performers of them all. The BVP Nasdaq Emerging Cloud Index, which tracks mostly younger, “pure-play” cloud names, as of last month had gained 435% in six years. That return dwarfed the 117% gain in the Nasdaq Composite.
Those returns have come down of late, however. The index has pulled back 16% from July highs. Some components — most notably Shopify (NYSE:SHOP), whose bubble seems to have burst — have fallen even further.
Admittedly, to some investors, the pullback seems like a long-awaited and much-needed correction. Revenue multiples of 10x and even 20x are not uncommon among cloud growth stocks. The opportunity in software-as-a-service is enormous. The valuations remain equally so.
But for those who favor growth stocks, the pullback might well seem like an opportunity. Cloud stocks aren’t cheap — but they shouldn’t be. Growth should continue for years, if not decades. The operating model depresses near-term profits as new customers are acquired, but it results in predictable, “sticky,” high-margin revenue for years to come.
These 10 cloud growth stocks all are components of the Emerging Cloud Index. And all 10 look at least more attractive after the sector-wide weakness. Admittedly, none seem notably cheap — and there’s no reason selling pressure can’t continue in the near term. Still, for those who have missed out on the gains so far, the new lower prices do create more attractive entry points to finally hop on board.
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Square (NYSE:SQ) admittedly is a somewhat odd choice