eyeQ: this sector may have run out of steam
Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. It’s now saying the time is right to sell some of these stocks.
23rd October 2024 11:39
by Huw Roberts from eyeQ
"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ
- Discover: eyeQ analysis explained | eyeQ: our smart machine in action | Glossary
Global X Cloud Computing ETF
Data below refers to the US version of the respective ETF, but we’ve also supplied a ticker for the UK equivalent.
Macro Relevance: 81%
Fair Value Gap: -6.39% discount to model value
Data correct as at 23 October 2024. Please click glossary for explanation of terms. Long-term strategic model.
Thus far, artificial intelligence (AI) has been a picks-and-shovels play, i.e. investors have focused on either NVIDIA Corp (NASDAQ:NVDA), which provides the chips for Large Language Models, and/or the energy stocks (especially nuclear) which will power the data centres.
That’s worked well, but increasingly the focus will shift to which stocks are the best plays for the next stage as (hopefully) the use cases of generative AI broadens out into day-to-day life/business. For some people, cloud computers and SaaS (software as a service) companies are clear contenders for that title – the next beneficiaries of the AI revolution.
For those who don’t have time to pick the individual winners, Global X have an exchange-traded fund (ETF), Global X Cloud Computing ETF USD Acc (LSE:CLO), that provides exposure to global cloud computing companies. It includes stocks such as Wix.com Ltd (NASDAQ:WIX), Zoom Video Communications Inc (NASDAQ:ZM), Dropbox Inc Class A (NASDAQ:DBX) and Salesforce Inc (NYSE:CRM).
The trouble is the most recent rally has taken this ETF 6.4% above where macro fundamentals say it should trade.
As we move into year-end, prepare for a deluge of commentators giving their picks for 2025. There’s a fair chance that SaaS and cloud computing stocks will be on several of those lists.
Right now at least, eyeQ respectfully disagrees. For those already invested, a fair degree of good news is in the price, so consider lightening up. For those watching from the sideline, this is not the best entry level.
Source: eyeQ. Past performance is not a guide to future performance.
Useful terminology:
Model value
Where our smart machine calculates that any stock market index, single stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.
Model (macro) relevance
How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.
Fair Value Gap (FVG)
The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.
Long Term model
This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.
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