(Click on image to enlarge)

An important rule of thumb for SaaS (software-as-a-service) companies is known as the “40% rule.” This states that if the sum of a company’s free cash flow margin and revenue growth both exceed 40%, the business has a solid balance of growth and profit that enables it to expand efficiently going forward.

From the chart above, we see that before 2013, Adobe’s growth was slowing and its free cash flow margin diminishing. But after 2013, it had a steady growth in revenue and a gradual increase in free cash flow margin. Now, with its established cloud subscription-based business model, Adobe has regained its status as one of the world’s largest technology companies, with a market cap of nearly $140 billion dollars.4

Conclusion

WisdomTree believes cloud computing has disrupted the software sector. While mega-cap tech is facing challenges due to increased government scrutiny, cloud computing could be in the middle innings of its growth curve. For investors seeking better returns but the same growth-oriented, technology-focused exposure in their portfolios, the WisdomTree Cloud Computing Fund (WCLD) could be a compelling alternative.

¹WCLD does not hold any FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks

²Adobe Inc. (ticker symbol: ADBE) has a 2.01% weight in the WisdomTree Cloud Computing Fund as of 9/24/19.

³ Sprague, Kara. “Reborn in the Cloud.” McKinsey Digital, 2015
⁴Source: Bloomberg, as of 9/6/19.