Dropbox’s $8B Valuation Does Nothing for Cloud Computing ETF

ETF Trends

The First Trust ISE Cloud Computing Index Fund (SKYY) has returned 21% this year, a decent performance, but also one that lags the PowerShares QQQ (QQQ) and the Nasdaq Composite (^IXIC).

Although investors have bought into the thesis that cloud-computing firms are purveyors of disruptive, game-changing technologies, calls are mounting that, just as they have with social media stocks, that shares of cloud companies have entered bubble territory.

The argument has some merit, but it lacks some as well. For example, SKYY’s P/E ratio is below 28, according to First Trust data.

That is nowhere close to the P/E ratio of 150 sported by the Nasdaq 100 in late 1999, just before the tech bubble burst. [The Changing Face of QQQ]

Still, there are some that believe cloud stocks, including some that reside in SKYY, have entered bubble territory. “Cloud computing and social media are bringing a level of disruption and innovation not seen in the technology sector since the dot-com era. The troubling aspect is that valuations for many of these companies seem just as stretched as Internet stocks were back then. We think investors may be paying too much for the growth inherent in these companies,” according to Janus Capital.

Then there is the case of file-sharing Dropbox, the not-yet-public company that is looking for a valuation of $8 billion, which would price the company at 40 times estimated 2013 revenue of $200 million, according to TechCrunch.

Assuming Dropbox goes public, and indications are that it will, it would likely enter ETFs such as the Renaissance IPO ETF (IPO) prior to joining SKYY.

However, Dropbox is viewed as a cloud-computing firm, so it would make for a logical addition to SKYY at some point. SKYY may not be a “bellwether” ETF, but it is the lone cloud-computing ETF, making its reaction to news of Dropbox thinking it is worth $8 billion interesting.

SKYY is down 3% to start this week, indicating that either investors are concerned about a cloud bubble, are not buying Dropbox being worth more than double Boston Beer (SAM) or both.  Making matters all the more concerning for SKYY in the near-term is that the ETF is declining when the following stocks are found among its top-10 holdings: Facebook (FB), Netflix (NFLX), Salesforce (CRM) and Amazon (AMZN).

First Trust ISE Cloud Computing Index Fund

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