WCLD Rebalance – A Continuation of IPO and M&A Trends
The semi-annual review and rebalance of the WisdomTree Cloud Computing Fund (WCLD) provides a window into recent developments in cloud companies—with a fresh pipeline of new additions following their initial public offerings (IPOs), which we believe is key to sustaining WCLD’s performance. WCLD follows a rules-based methodology that resets constituents and weights back to equal weight in February and August. This simple, yet effective, approach provides significant exposure to fast-growing, emerging businesses that are often overlooked or diluted in market cap-weighted benchmarks.
The August 2021 rebalance illustrates robust IPO and merger & acquisition (M&A) activity, with a steady inflow of public market entrants and an outflow of recently acquired cloud companies.
The Additions – All IPOs
The three additions to WCLD were UiPath, Inc., C3.ai, Inc., and Qualtrics International, Inc.1 Each one of these companies was once named on the Cloud 100 list, a definitive ranking of the top 100 private cloud companies by Bessemer Venture Partners, Forbes and Salesforce Ventures. We recently recapped the 2021 Cloud 100 list—one of the key takeaways was that a meaningful portion of today’s public cloud market consists of former Cloud 100 constituents. Following this rebalance, 29 of the 58 companies in WCLD are Cloud 100 graduates.
The most recent IPO addition from April 2021 was UiPath, a company focused on automating business processes across various departments of an enterprise. More specifically, UiPath’s software platform uses artificial intelligence (AI) to perform tasks like logging into applications, extracting information from documents, moving folders, filling in forms and updating information fields and databases. Deloitte is an example of a company that has leveraged UiPath’s robotic process automation (RPA) platform and its digital workforce to execute repetitive and mundane tasks. Bessemer Venture Partners recently hosted the company’s CEO, Daniel Dines, on its Cloud Giants podcast to discuss UiPath’s founding and its vision for a fully automated enterprise—you can listen to the full discussion here.
Another artificial intelligence add was C3.ai, Inc., which went public in December 2020 and provides cloud software that enables enterprises to develop and deploy AI applications. One of the many customers the company highlights is a Fortune 500 commercial lender with a legacy credit assessment process that took weeks, on average. With C3.ai’s Smart Lending software application, the lender was able to use machine learning to reduce the average assessment timeline by 30%. C3.ai offers customers the ability to build customized enterprise AI applications, as well as families of turnkey AI applications that target various industry verticals, like financial services, manufacturing, utilities, oil and gas, and aerospace and defense.
Qualtrics International, Inc., went public in January 2021 and offers a single software platform for enterprises to manage their customers, employees, products and branding. As an example, JetBlue partners with Qualtrics for customer experience management that merges data on purchase drivers, experience and satisfaction into a centralized hub. This feedback loop helps JetBlue make impactful macro-level (e.g., the introduction of new pricing structures for all passengers) and micro-level decisions (e.g., accommodations specific to an airport, terminal or gate that address customer dissatisfaction).
The Drops – All M&A Targets
Similar to February 2021, all of the drops from WCLD are pending acquisition targets. It is especially reassuring that the removals are not because of failures to meet growth requirements, but instead because these businesses are attractive takeover candidates. This brings the tally to 16 companies held within WCLD that have been acquired or are pending acquisitions at premium deal multiples.
One of the acquisitions involved two cloud constituents: Five9 as the target and Zoom Video Communications as the acquirer. We recently wrote about the deal here—the high-level takeaway is that this business combination embeds a cloud-based customer service contact system into Zoom’s video and phone platforms.
The End Results
The private and public cloud markets are fast-moving, and WCLD’s semi-annual rebalance allows the Fund to refresh its constituents and weights for the latest developments.
From a fundamental perspective, there was not an overly significant change in this rebalance. As expected with a reset back to an equally weighted basket, aggregate valuation and size modestly decreased across the portfolio. Meanwhile, revenue growth slightly increased, which is a vote of confidence in the consistent growth rates achieved by the constituents, especially with a difficult year-over-year comparison to 2020, when many of the companies experienced elevated expansion as their customers digitized their operations in earlier stages of the COVID-19 pandemic.
To gain exposure to the ongoing evolution of the public cloud market, investors should consider adding WCLD to their portfolio.
1As of 8/19/21, WCLD held 1.7% of its total weight in each of UiPath, Inc., Qualtrics International, Inc., and C3.ai, Inc.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. The Fund invests in cloud computing companies, which are heavily dependent on the Internet and utilizing a distributed network of servers over the Internet. Cloud computing companies may have limited product lines, markets, financial resources or personnel and are subject to the risks of changes in business cycles, world economic growth, technological progress and government regulation. These companies typically face intense competition and potentially rapid product obsolescence.
Additionally, many cloud computing companies store sensitive consumer information and could be the target of cybersecurity attacks and other types of theft, which could have a negative impact on these companies and the Fund. Securities of cloud computing companies tend to be more volatile than securities of companies that rely less heavily on technology and, specifically, on the Internet. Cloud computing companies can typically engage in significant amounts of spending on research and development, and rapid changes to the field could have a material adverse effect on a company’s operating results. The composition of the Index is heavily dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.