Time For Cloud Computing ETF On Upbeat Earnings?

This earnings season fared well for the tech space with tech-heavy Nasdaq 100 ETF QQQ gaining about 3.4% in the last one month (as of August 19, 2016) compared with 0.7% gains recorded by the S&P 500-based (AX:SPY) (read: Time to Buy These Tech ETFs?).

Solid performance by tech giants is behind this rise. Notably, technology is one of two sectors with the highest proportion of positive surprises, as per the Earnings Trends issued on August 18.

Already Q2 results from 93.9% of the tech sector’s total market capitalization in the S&P 500 index are out. Going by the Earnings Trends report, total earnings for the tech companies were down 0.3% while revenues increased 2.9%. As much as 83.3% beat EPS estimates while 74.1% surpassed revenue expectations (read: Technology Dividend ETFs for Growth & Income).

A Look at Cloud Computing Segment

Against such a backdrop, it is warranted to have a closer look at the cloud computing segment of the broader technology sector. Cloud computing is a procedure by which data or software is stored outside a computer, but can be easily accessed anywhere/any time via the Internet. This process is gaining traction as it can cut IT costs of companies by removing expensive servers and trim maintenance staff.

IDC noted that worldwide revenues from public cloud services will be more than double the level forecast for 2016 and will grow at a CAGR of 20.4% over the 2015–2020 forecast period.

Inside SKYY and its Key Constituents’ Recent Earnings

The cloud-computing ETF SKYY has amassed about $561.8 million in assets so far and charges 60 bps in fees. The product advanced about 4.6% in the last one month (as of August 19, 2016). The portfolio has a tilt toward software and Internet companies, though technology hardware and communication equipment also have sizable allocation.

In total, the fund holds about 34 securities in its basket. NetApp ( (NASDAQ:NTAP) is SKYY’s top holding with 5.08% exposure. The company beat on both lines in Q1 of fiscal 2017, leading the stock to gain about 20.3% in the two days following the release of its earnings (as of August 19, 2016).

In the fiscal first quarter, NetApp’s adjusted earnings of 28 cents per share beat the Zacks Consensus Estimate of 18 cents and witnessed a whopping sevenfold year-over-year jump. Net revenue of $1.294 billion surpassed the Zacks Consensus Estimate of $1.264 billion. However, on a year-over-year basis, the top line witnessed a decline of 3.1%.

The stock has a top VGM score of ‘A’ with a Zacks Rank #1 (Strong Buy) at the time of writing. Its Zacks industry rank is in the top 22%.

The fund’s second holding is NetSuite (NYSE:N) with a 4.89% focus. Its industry rank is in the top 37% at the time of writing. On July 28, its total revenue for Q2 of 2016 was $230.8 million, up 30% year over year and almost in line with the Zacks Consensus Estimate. As per press release, non-GAAP earnings per share were $0.08. The stock gained about 36% since earnings were reported.

Its fourth holding VMware Inc. (NYSE:VMW) , with about 4.13% weight, reported on July 18, 2016. The company’s second-quarter adjusted earnings of 69 cents met the Zacks Consensus Estimate. Revenues of $1.693 billion however easily beat the consensus mark of $1.678 billion.

On a year-over-year basis, revenues grew 11.3% driven by strong performance of newer cloud offerings like NSX, virtual SAN and End-User Computing. Since reporting earnings, VMW gained about 16.4% (as of August 19, 2016). VMW has a Zacks Rank #2 (Buy) with its industry rank in the top 37%.

Teradata Corp.’s (NYSE:TDC) second-quarter 2016 adjusted earnings per share of 65 cents and revenues of $599 million easily topped the Zacks Consensus Estimate of 51 cents and $560.4 million, respectively. On a year-over-year basis, adjusted earnings grew 38.3% but revenues fell 3.9%. The company reiterated its earnings and revenue guidance for 2016. The stock gained about 7.7% since reporting earnings on August 2. TDC has a VGM score of ‘A’ and its industry rank is in the top 22%.

SAP SE (DE:SAPG) (TO:SAP) is the next holding with 4.03% focus. The company reported second-quarter 2016 IFRS earnings of €0.68 (77 cents) per share, up 74.4% from €0.39 earned a year ago. Total IFRS revenue in the second quarter was €5,237 million ($5,913.7 million), up 5.4% year over year. A flourishing cloud business coupled with strong support revenues favored the top line. This Zacks Rank #3 (Hold) stock’s industry rank is in top 37%, at the time of writing.

Google’s parent company Alphabet Inc. (NASDAQ:GOOGL) holds the next position. Alphabet reported adjusted earnings of $7.00 per share during the quarter, beating the Zacks Consensus Estimate of $6.47. Adjusted revenues of $17.5 billion came in much above the Zacks Consensus Estimate of $16.9 billion. The stock gained about 4.4% since reporting earnings on July 28 (read: 4 ETFs to Tap Alphabet Post Upbeat Q2 Earnings).

Bottom Line

So for investors keen on playing this thriving cloud computing space, the time is ripe for building a position in SKYY. The fund has a promising profile and gives exposure to the broader universe of cloud computing.

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