Biggest SaaS Stock Drives Cloud Computing ETF Higher

Salesforce’s blowout earnings report propelled WCLD to a nice gain this week.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

As the market environment has shifted from favoring growth to profits, one of the hottest growth stocks of the past decade is successfully pivoting.  

Salesforce Inc., one of the originators of the software-as-a-service model, surged 11.5% on Thursday after blowing past earnings and margin estimates.  

The move helped push the WisdomTree Cloud Computing Fund (WCLD) up by 2% on Thursday and another 3% on Friday.  

For the fourth quarter, Salesforce reported non-GAAP earnings per share of $1.68, well ahead of the $1.36 analysts were expecting. At the same time, it said that its non-GAAP operating margin was 29.2%, the highest ever for the company. 

For this year, the company now expects non-GAAP EPS of $7.13, which compares with the $5.84 analysts were anticipating before the latest guidance.  

Activist Push  

Salesforce’s sudden focus on profitability wasn’t solely intrinsically motivated. Several activist investors have been pushing the company to cut costs in order to beef up profits and support the stock price. 

The most notable of those activists is Elliott Management, which took a stake in the stock in January.  

After his company reported blowout results, Salesforce CEO Marc Benioff praised the activists. He called them “great new investors” who he enjoys listening to and getting feedback from.  

Salesforce’s impressive earnings report contrasted with that from another software titan, Snowflake Inc. 

On Thursday, that stock dropped more than 12% after releasing underwhelming guidance. For this year, the firm is forecasting revenue growth of 40% and non-GAAP operating margins of 6%. Both were less than analysts were expecting.  

While still growing at an impressive clip, investors expected more from Snowflake, which is one of the most expensive tech stocks. 

In a market that favors profits over growth, not prioritizing profits and then also missing growth numbers is the worst of both worlds. Hence, the big drop in the stock.  

A Tough Transition  

The contrasting earnings reports from two of the biggest enterprise SaaS companies points to the difficulties of transitioning from a growth-at-all costs model to a more profitable growth model. 

Many cloud companies were successful in the prior regime, where the market rewarded growth regardless of whether that growth would ultimately translate into earnings. 

Now with investors pushing these companies to show profits, some of them are finding it difficult to do so without jeopardizing their future growth. 

In many cases, more profits require lower expenses, and lower expenses—especially in the key sales and marketing departments—sometimes means drastically lower growth.  

The calculus is made more difficult by the macro environment. Unlike some parts of the economy that are growing briskly, spending on tech has decelerated sharply in recent months as the postpandemic digital boom fades.  

Still, Salesforce’s success in generating hefty profits and growth even after cutting its workforce by 10% proves that, at least for the cloud software companies that sell mission-critical products, a more balanced approach to growth is possible. 

For the aforementioned WCLD, which holds an equal-weighted basket of 70 cloud computing stocks, performance will depend on whether there are more Salesforce-like companies out there that can successfully make the transition.  

 

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Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.