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Monday, Mar 27th

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MGI Cloud 30 Index Update FEB 2017

MGI Research has updated the composition of MGI Cloud 30tm Index by introducing new positions to replace those that were acquired and switching out companies that have so far not lived up to their original intent to be a significant cloud computing player. 

Background

DISCLAIMER: The information presented here is not an offering or a recommendation to buy or sell any securities in any market and does not represent investment advice in any form.

Since late 2009 MGI Research has been tracking the performance of an index called MGI Cloud 30. The aim was to create a proxy for performance of technology companies likely to benefit disproportionately from adoption of cloud computing. The index (Bloomberg: MGICLOUD), has demonstrated that cloud computing is a significant, distinct and durable multi-year trend that has produced definitive winners and losers. For a period from Dec 21st 2009 to Feb 10th 2017 a model portfolio of MGICloud 30 index equities has cumulatively returned over 252% vs. about 108% for the S&P500 benchmark during the same period. MGI Cloud 30 Index has been up every year since inception as the chart of average cumulative returns illustrates below.

MGI Cloud 30 Index Average Cumulative Performance

While the performance of  the index showed strength on an absolute, relative and annual basis, it is also clear that adoption of cloud computing is still in the early stages and familiarity with cloud computing amongst practitioners, business professionals and investors is still sparse. This is reflected in relatively high volatility of cloud equities.

When the MGI Cloud 30 Index was originally constructed, the aim was to select companies that are primary, secondary and tertiary beneficiaries of cloud computing. The portfolio was logically divided into three large groups:

  1. Pure Plays – Salesforce.com, NetSuite, et al
  2. Infrastructure Providers – Amazon, Rackspace, Equinix, Digital Realty, et al
  3. Tools Suppliers for the Cloud – Riverbed, Citrix, Vmware, et al

Over the last several years we have seen definitive winners and losers amongst pure plays and infrastructure providers, e.g. Amazon vs. Rackspace. We have seen more losers than winners amongst the tool suppliers, - an area that was originally viewed as “arms suppliers” to the cloud but one that has largely failed to transition out of its legacy on-premise business. The pure play area is dominated by software-as-a-service (SaaS) companies while the infrastructure arena is dominated by Amazon Web Services on the one hand and providers of data centers like Equinix, Digital Realty Trust on the other hand. Suppliers of tools have largely failed to grow their cloud busineses fast enough to reach escape velocity that would have transformed their busineses from largely on-premise to largely-cloud. A number of incumbent tech industry giants that were not originally selected for the index and still remain on the outside also fall into the category of cloud losers.  

The index also excludes many large cap tech giants that have a minimal direct revenue contribution from cloud computing. Some of these are growing and we are keeping an eye on them including Microsoft. As index positions are revenue and not market cap weighted, companies need to demonstrate meaningful contribution of cloud computing revenue components in terms of percentage of overall revenue, critical mass of revenue and revenue growth. We continue to monitor the industry metrics of all leading cloud computing participants. 

New Components of MGI Cloud 30tm

As of end of day on February 1st 2017 we updated the composition of MGI Cloud 30 index to reflect acquisitions of several components. We have also taken a step to trim from the index those firms that have not been able to achieve critical mass in cloud computing and/or are not meeting minimum requirements for liquidity. 

The new issues added include:

Company

Symbol

Notes

Nutanix, Inc.

NTNX

Replaced Aruba Networks acquired by HP

Atlassian Corp.

TEAM

Replaced Click Software acquired by Francisco Partners

ZenDesk, Inc.

ZEN

Replaced Concur Technologies acquired by SAP SE

Ring Central, Inc.

RNG

Replaced Constant Contact acquired by Endurance International

Paycom Software, Inc.

PAYC

Replaced NetSuite acquired by Oracle

New Relic, Inc.

NEWR

Replaced Rackspace acquired by Apollo Global

Arista Networks, Inc.

ANET

Replaced Riverbed acquired by Thoma Bravo

Shopify, Inc.

SHOP

Replaced DealerTrack acquired by Cox Automotive

HubSpot Inc.

HUBS

Replaced Marketo acquired by Vista Equity

We have also replaced a few components that in our view no longer meet the original selection criteria and introduced the following new components:

Company

Symbol

Notes

Veeva Systems, Inc.

VEEV

Replaced Citrix Systems  

Cyrus One

CONE

Replaced InterNAP

Coupa Software, Inc.

COUP

Replaced Limelight Networks, Inc.

Twilio, Inc.

TWLO

Replaced VMware

Two companies in MGI Cloud 30 Index – Level 3 Systems (LVLT) and CenturyLink (CTL) are involved in an M&A transaction with CenturyLink acquiring Level 3 for a combination of cash and stock. Once the transaction is completed, we will be updating the index portfolio again.

The new components added on February 1st 2017 broadly separate into two major groups – Cloud Applications and Cloud Infrastructure and aims to capture advances that are taking place in cloud business applications, agile development, ecommerce, automated marketing, next generation data centers and vertically oriented cloud software offerings.

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