This Friday morning the equity markets are under pressure after an extended run and on the news that the yield curve is likely to invert soon. But Zuora (NYSE:ZUO) has its own reasons to fall today.
Last night, management reported earnings and investors did not like what they saw. Zuo stock is falling 13% on the headline so they were clearly disappointed with the results. But luckily for the bulls, the stock came into the earnings event up 35% year-to-date and 25% since inception last April. This can be good news from that perspective but it also suggests that there could be more room to fall.
First, let’s examine the business model. Fundamentally, ZUO should have a prosperous future for years to come. It provides subscription software services to cloud-based businesses. There will be ample supply of potential customers as the whole globe is seeking to operate in the cloud.
Salesforce (NYSE:CRM) launched the trend and it is now a thesis that is growing exponentially with no chance or reversion. All the major mega-tech companies like Microsoft (NASDAQ:MSFT) completely shifted their models to it and the rest of the world is in hot pursuit.
Management delivered results that met or beat the expectations for the past quarter. But they failed to wow Wall Street with the next one and full-year guidance. These days that’s almost all that matters to traders.
Most often, if the company thesis is still intact, the short-term reaction to the stock is only temporary. There is a let-down effect from a disconnect on expectations. This is a momentum stock and they usually overshoot in both directions, up and down. This makes them difficult to trade because when they are falling like Zuora stock is today, they look like they are headed to zero.
Luckily we can find the important levels on the chart to guess where there will be a support to find proper entry points.
How to Approach ZUO Stock
Those who want to own the shares long term need not worry about this drop. Today’s dip in price doesn’t change the ongoing thesis. And if I already own the shares, I would not sell out of them today.
Shorter term, there are important lines that matter from the technical aspect.
This morning, ZUO stock is falling into the $21 per share zone. This has been pivotal since its inception. After the IPO, the stock rallied to $37 per share, then corrected sharply back to today’s level fast. Then, when the stock markets in general collapsed into Christmas, ZUO made new lows to $15 per share. Somewhere in the middle lies the truth.
Based on the volume profile, both bulls and bears agree on the current zone as a value area. So they will fight it out hard here, thereby creating congestion in price. This usually lends support to the stock.
The December low for ZUO was a double bottom of sorts, so it makes for solid footing set on very sour sentiment on Wall Street. While the zone between $20 and $21 per share seems strong, $19 played an important role for the last few months. So I expect that if this first line of defense fails, the bottom end of the next one will also be secondary support at $18.20 area. These are not forecasts, but rather, where I can expect potential support.
The ZUO stock bulls will need the technicals to lend help because the fundamental value of the stock probably won’t.
Yes, this is an exciting stock in the hot area of business, but it is still too rich from the traditional sense. But it is now trading about where it came out of the IPO, so for those who missed out on the entry, this would be their chance.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.