When investors obsess over the artificial intelligence (AI) trade, they tend to look exclusively at hardware, buying up chip designers like Nvidia (NVDA) or memory manufacturers like Micron (MU). But there’s another component of this “just trust us” rally in AI-related stocks. Infrastructure software names have been left behind.
They’re now catching up quickly.
More Yield, Less Trap: Sign up free to get Barchart’s daily Dividend Investor newsletter straight to your inbox.
Look no further than the Global X Cloud Computing ETF (CLOU). This fund had put shareholders through a pair of $26 to $18 moves. And that’s just since February of this year! So there’s volatility and a feast for swing traders.
www.barchart.com But is there life beyond this? Or is it getting cloudy again, as CLOU again knocks up against the $26 level.
While the S&P 500 Index ($SPX) and the hardware-heavy tech indexes have spent the past several years melting vertically higher, CLOU has languished in a prolonged structural consolidation. But as the mega-cap hardware trade gets top-heavy and faces a looming depreciation trap, capital is beginning to rotate. The cloud software stocks do show signs of putting in a major multi-year floor, and CLOU is uniquely built to benefit from the exact moment the market realizes that hardware is nothing without the apps that run on it.
The only question I have is whether the systematic way markets now trade could stop progress. This is not a market known for distinguishing between sub-sectors for very long.
CLOU: Concentrated ETF Is a Better Play Here
To understand the tactical case for CLOU, you first have to understand why it looks so radically different from broad tech trackers like XLK or QQQ.
If you buy a standard technology index fund, you are effectively buying a disguised mega-cap conglomerate portfolio heavily dominated by multitrillion-dollar juggernauts. CLOU’s index methodology fights this concentration risk head on.
It tracks the Indxx Global Cloud Computing Index, which requires companies to derive at least 50% of their revenue from pure-play cloud computing services like software as a service, platform as a service, and infrastructure as a service.
Crucially, it caps the influence of generalized tech behemoths. While tech titans like Microsoft (MSFT) and Amazon (AMZN) are eligible for entry, their combined total weight inside the fund is strictly capped at a maximum of 10%. That helps modify the price-earnings ratio, which stands at a tolerable 22x trailing earnings, even after the recent up move.
www.barchart.com In addition, as you can see below, CLOU has actually lost money over the last five years. That in itself is refreshing as opposed to all the performance-chasing going on.
This rules-based constraint shifts the absolute weight of the fund directly to the secondary tier of pure-play, mid-cap cloud infrastructure and operational software specialists, like the ones shown here.
www.barchart.com The fundamental thesis for buying CLOU right now comes down to this. Over the last two years, corporate America has poured hundreds of billions of dollars into capital expenditures to buy GPUs, lay fiber, and establish foundational AI data centers. But data centers sitting empty are a liability. For corporations to realize a return on those massive infrastructure investments, they must deploy software applications that can actually monetize that compute power.
We are transitioning into that EXACT phase. Gartner data projects that as enterprises scale their AI deployments, cloud-based software's share of total global IT spending will surge from roughly 15% to an estimated 40% by 2030.
Instead of paying nosebleed valuations for hardware manufacturers trading at 40x sales, accumulating CLOU at a massive valuation discount is a strong consideration
If your strategy is to chase the same three hardware stocks pushing index concentration to record highs, you are accepting immense structural risk. CLOU represents the ultimate tactical rotation play for the next phase of the technological expansion.
It gives you direct exposure to the high-margin software layer that will actually distribute and monetize artificial intelligence, all while completely insulating you from mega-cap concentration via its 10% mega-cap capping rule. The base is built, the valuation is compressed, and the technical path of least resistance is quietly shifting to the upside. It’s time to stop chasing the hardware hype and position for the software breakout.
If you believe as I do that the “software apocalypse” was overdone earlier this year, CLOU is one to watch.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob’s written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
We Now Know for Sure That the Software Apocalypse Selloff Was Overdone. Buy Cloud and Software Stocks Now to Profit. Invest Like Warren Buffett and Buy Wide-Moat Stocks Via This ETF Ahead of a Major Market Shift How Overzealous Option Traders Are Making 3X Leveraged ETFs Look Like Saviors A ‘Golden Dome’ Has Formed on the Chart of This Gold Mining ETF. The Bull Rally in Precious Metals Has Run Out of Steam.