Is Investing in Cloud Companies Dead in 2022?

Global Head of Research

Thus far in 2022, the volume with which “rising interest rates” have been trumpeted has been deafening. Whether people are looking at inflation or upcoming Fed policy, it has been impossible to ignore.

The initial casualty? Tech companies in the earlier stages of their life cycles with very low or even negative earnings. 

  • In a zero interest rate world, many of these companies were supplying important “work-from-home” services and software, and the future-oriented cash flows could be valued more highly, pushing up valuations
  • With higher rates, it’s not that these companies immediately cease to exist, but the market has to re-evaluate the appropriate multiples of forward-looking revenues and earnings, in many cases functioning like the force of gravity on elevated share prices from the past few years. 

Therefore, does it make sense to ignore cloud computing in 2022—a megatrend that boasts many of these software companies with low or negative current earnings? 

Megatrends and Time Horizons

Think about this question:

If you were reading about a megatrend that was expected to last only one year, how would you react?

I have done many “megatrend” presentations, and my feeling from this experience is that one of the first things investors want to see with a megatrend is an extended time horizon. If an audience feels that a trend won’t have legs beyond three or even five years, it is tough to convince them that your topic even qualifies. 

Therefore, one of the first things to do is reframe our baseline. 

  • If the top priority is 2022 performance, full stop, then cloud computing as an investment strategy could be challenging. What we know today would make this a difficult choice.
  • If we are thinking of investment horizons 10 (or more) years out, the interest rate transition could create some interesting opportunities, making good businesses less expensive on a share price basis. Interest rates won’t go up continuously for a decade, so a longer horizon could make 2022 potentially interesting for points of entry, relative to late 2020 or different parts of 2021. 

What Is Happening with the Cloud?

Cloud computing is really just infrastructure—it is a way to access software or computing power that is more effective and efficient than directly owning every piece of software and every piece of hardware that you would ever need, physically on the premises. 

Boom Supersonic, a startup that has already promised to deliver 15 supersonic jets to United Airlines, is an interesting example. 

History has shown that supersonic passenger transport is not easy. The prior example, the Concorde, took 25 years of development and $5 billion to launch its first commercial flight, an event that occurred in 1976. Boom believes it can cut down this development time by 50% and do so at a much more efficient cost. How would this be done? The primary method would be through access to cloud supercomputing. Simulations would allow Boom to replace most of the physical prototyping and wind tunnel testing required by the Concorde.1 To put numbers to it:

  • Boom could afford to quickly run 53 million compute hours using Amazon Web Services infrastructure.
  • If the need arose to shift to 100 million compute hours, this would easily be doable in short order.1

This is merely one example of how broader access to supercomputing infrastructure could help one specific company develop one specific thing. It’s true that many other megatrends, like artificial intelligence or biotechnology, will be taking full advantage of this. Importantly, these are multiyear projects, with few expected to completely finish in 2022. Many are just starting.

The Big Players Have Continued to Grow at 30% or More

If the largest companies in a particular space are continuing to exhibit strong growth, we believe it says something about the opportunity set within the broader space. Amazon and Microsoft are by far the largest players in the public cloud:

  • Amazon has noted the size of its cloud business, by revenue, at $16.1 billion in its most recent quarter, indicating 39% year-over-year growth. 
  • Microsoft has noted the size of its cloud business, by revenue, at $20.7 billion in its most recent quarter, with growth at 36% year-over-year.3  

Now, it would be incorrect to assume that all cloud-oriented players are the same—it’s certainly not a monolithic megatrend. Many have looked at Zoom Video Communications, which was the quintessential work-from-home service and has been transitioning from reporting revenue growth of roughly 350% year-over-year during its quarterly earnings calls in 2020 to something more reasonable, maybe 30%–40%, more recently.4 There are companies like this, where the pace of 2020 growth was not going to be sustainable, which will still grow but will have to adjust to more normal conditions. 

Established Companies Can Use Their Cash Hoards to Make Deals and Continue Their Growth

Alphabet’s Google Cloud is not yet a leader in cloud computing, at least not yet on par with Amazon or Microsoft. In its most recent quarter, Google Cloud grew at 45% year-over-year in terms of revenue, but this got it to a level of $4.99 billion.5 However, Alphabet overall has a very large cash store: $142 billion. During 2021, deals were announced where Google took a stake in CME Group and Univision, and then these companies made commitments to use Google Cloud—in certain cases an arrangement like that could be worth more than $1 billion in revenue to Google.6 

Google has a roughly 6% market share in the public cloud, as compared to Amazon at 41% and Microsoft at 20%.6 It cannot be underestimated what all three of these companies can do with their cash levels to incentivize customers and acquire new capabilities.

Conclusion: Those Looking Further Than 2022 Could See Opportunity in Cloud Computing

In the end, even if the initial landscape brings the challenges into sharper relief than the opportunities, we would encourage investors not to completely forget cloud computing. It is clear that many of these companies will see their valuations adjust to a non-zero interest rate environment, but their business models and the services they provide remain important and in strong demand. With an appropriately long time horizon, there could be opportunity in software-oriented companies like this in 2022. 



1 Source: Joris Poort, “How Cloud-Based Supercomputing is Changing R&D,” Harvard Business Review, 11/29/21. 

2 Source: Sebastian Herrera, “Amazon Earnings Suffer as Growth Slows, Costs Rise,” Wall Street Journal, 10/28/21. 

3 Source: Aaron Tilley, “Microsoft Earnings Jump as Cloud Services Thrive,” Wall Street Journal, 10/26/21. 

4 Source: Dan Gallagher, “Zoom has Some Unhappy Hours Remaining,” Wall Street Journal. 11/23/21. 

5 Source: Tripp Mickle, “Google Nearly Doubles Profit Behind Red-Hot Ad Market,” Wall Street Journal, 10/26/21. 

6 Source: Tripp Mickle & Aaron Tilley, “Google and Tech Rivals Tap Cash Reserves to Realise Cloud Ambitions.” Wall Street Journal, 12/29/21. 


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About the Contributor
Global Head of Research

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation.