Cloud computing stocks lose new year gains early in 2023

Following a challenging year for the cloud computing sector, Yext, AvidXchange and Squarespace all looked like they were on an upward trend for the new year. However, AvidXchange fell 7% on 3 January, while Squarespace fell nearly 6% the following day.

- Cloud computing stocks lost late December gains early in new year

- 2022 was marred by tech layoffs, which look set to continue

- The WisdomTree Cloud Computing ETF holds AvidXchange, Yext and Squarespace

Cloud computing stocks, including AvidXchange [AVDX], Yext [YEXT] and Squarespace [SQSP], saw their values drop early in 2023 after rapid gains seen in the final week of 2022.

AvidXchange rose 9.5% in the last week of the year but has fallen 6.5% since the new year. Yext tells a similar story, rising 6.7% and falling 4.9% over the same periods. Squarespace gained 2.9% in the last week of 2022 and a further 2.75% on 3 January before falling 6.1% to date. 

Cloud computing stocks suffered a slowdown in 2022. In the last year, Squarespace fell 20%, Yext fell 31.2%, and AvidXchange fell 29.7%.

All three suffered from the volatile macro conditions of the year, which had far-reaching impacts on the cloud computing sector as a whole. Major players, including Amazon [AMZN] and Salesforce [CRM], are making large rounds of staff reductions, while Google's parent company, Alphabet [GOOGL], is changing its performance review structure in what many observers believe is a prelude to further layoffs.

Board changes and earnings beats

In late December, AvidXchange announced two additions to its board. Sonali Sambhus joined, having previously headed up Block's [SQ] developer and machine learning platform, accompanied by Asif Ramji, founder & CEO of Venture Worx.

Yext announced its fall release on 15 December, with the AI search company unveiling a listings verifier and other enhancements to its' answers platform.'

Meanwhile, Wolfe Research kicked off coverage of website builder Squarespace this year, giving the company a 'peer perform' rating. 

In its most recent financial results, Yext achieved a positive EPS of $0.02 compared to losses of $0.01 per share anticipated by analysts. AvidXchange beat analyst expectations for EPS by 46%, while Squarespace delivered revenues in line with analyst expectations.

However, the outlook for the space is uncertain. AvidXchange CEO & co-founder Michael Praeger said his company was "cautiously optimistic" given the "volatile" macroeconomic backdrop to the company's recent results.

Cloud gains may be far on the horizon

Cloud computing stocks received a blow from a 4 January UBS Group downgrade of Microsoft's [MSFT] stock which took aim at the company's Azure cloud computing business. Analysts wrote that Azure "is entering a steep growth deceleration that could prove to be worse in FY23/FY24 than investors are modelling" and said that it wasn't just macro conditions leading to this growth slowdown but the maturation of the sector overall.

UBS lowered its price target for Microsoft from $300 to $250, saying its current valuation, approximately 22 times earnings, felt "fair, not cheap." UBS head of equities David Lefkowitz recently said in a blog post that "it is still too early to get back into 'tech' stocks," highlighting cloud computing as one of the segments that had seen a slowdown.

However, Dave Bujnowski of Baillie Gifford recently told Barron's that he has faith in cloud computing stocks over the long term, providing the companies involved have "durability." Besides Snowflake [SNOW], Bujnowski highlighted Datadog [DDOG], Cloudflare [NET] and HashiCorp [HCP] as among his favourites.

Funds in focus: WisdomTree Cloud Computing ETF

Yext is the largest holding in the WisdomTree Cloud Computing ETF [WCLD] as of 6 January, with a 2.32% weighting. AvidXchange is its fifth-largest with 1.92%, while Squarespace comes tenth with 1.76%. WCLD fell 46.9% over the past year, during which Yext fell 31.02%, showing that Yext has been one of the stronger performers among its peers over the period.

The fund holds Datadog at a 1.06% weighting, Cloudflare at 1.01% and Snowflake at 1.40%. 

Refinitiv analysts yield median 12-month price targets of $11.00, $6.20 and $24.00, respectively, for AvidXchange, Yext and Squarespace, implying an 18.4% upside for AvidXchange, a 0.2% downside for Yext, and 12.1% upside for Squarespace. All six analysts covering Yext gave it a 'hold' rating; the 12 following AvidXchange gave two 'buy' ratings, seven 'outperform,' two 'hold' and one 'underperform.' Meanwhile, 16 ratings for Squarespace yielded two 'buy,' four 'outperform' and 10 'hold' ratings.