Cloud-Computing Stocks: 1 Easy Way to Profit From Their Growth

There's money to be made in the skies, but which companies will prosper? Should you invest in the cloud-computing space with Zynga Inc, EMC Corporation, or Cisco Systems?

Apr 28, 2014 at 6:15PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some cloud-computing stocks to your portfolio but don't have the time or expertise to hand-pick a few, the First Trust ISE Cloud Computing Index ETF (NASDAQ:SKYY) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of cloud-computing stocks simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on cloud-computing stocks, sports a relatively low expense ratio -- an annual fee -- of 0.60%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This cloud-computing stocks ETF trounced the world market over the past year, but it's still young and thus lacks much of a track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why cloud-computing stocks?
As more and more information is stored and accessed via "the cloud," cloud computing stocks will see their profits, or potential profits, grow.

More than a handful of cloud-computing stocks had strong performances over the past year. Zynga Inc (NASDAQ:ZNGA) grew 22% and has enjoyed success with its popular Zynga Poker, Words with Friends, and FarmVille 2 games. Bears don't like the company's dependence on a few key games, and they wonder how well it will be able to monetize its offerings, as the vast majority of players play for free. The company has been struggling and laying off workers, but its last earnings report was promising, suggesting that a turnaround may be happening. Still, it's a bit too early to tell.

EMC Corporation (NYSE:EMC), the storage giant, gained 16%. EMC stands to profit from the rapidly growing cloud-computing and "Big Data" arenas, and it holds an 80% ownership stake in virtualization specialist VMware, too. (Though weak VMware bookings hurt its recent performance.) With EMC's forward price-to-earnings (P/E) ratio near 12, it seems attractively priced, though it hasn't been growing briskly. Still, it has many initiatives that could pay off well in the future, such as its RSA Security business. EMC initiated a dividend last year and yields 1.5%.

Cisco Systems (NASDAQ:CSCO) advanced 15% over the past year and offers a sizable 3.3% dividend yield. It has been buying back lots of stock, too. Bears worry about shrinking gross margins and slow cash-flow growth, and several research firms have downgraded its stock lately. Still, it generates a lot of cash that can help it reach its potential in cloud computing and data analytics. It seems undervalued, too, with its forward P/E near 11. Its first quarter offered some promise, with many of its problems (such as weakness in orders and emerging markets) seeming short-term in nature.

The big picture
If you're interested in adding some cloud-computing stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Rackspace Hosting, and VMware. The Motley Fool owns shares of EMC and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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