The NASDAQ price action coming out of the March market crash continues to impress. Even this morning, when the other indices were struggling a little, Nasdaq futures were still very green. Cloud stocks are at the forefront of this move, and out-performing others by a wide margin.
Some of these stocks have overextended themselves to the point that they are now precariously perched in very steep rising wedges. The panic buy programs currently in motion seem to favor froth over actual existing fundamentals.
And the frothier the stock, the crazier the price action. Some of these will disappoint badly and the situation draws easy parallels to the dot com bubble. It’s not that the trend they’re buying into is wrong, but that the purchasing has been undiscerning: investors are buying everything. This will likely leave many vulnerable to huge disappointments.
Tech stocks have great potential but not all of them can be long-term winners. A lot of them will fail to live up to the expectations presently priced into shares. For example, a price-to-sales ratio over 100 is simply way too high. Paying 100 years worth of sales to buy into any stock is ludicrous. By comparison, Amazon (NASDAQ:AMZN), which is considered expensive, has a P/S ratio of five.
The three stocks today all have valid business models that will prosper for a long time. It really boils down to finding the right levels and methods to trade them. Here are our three popular cloud stocks today:
Interestingly, I polled some of my community members to see which the cloud stocks that first come to mind. The list did not include CRM or Amazon (NASDAQ:AMZN), two companies that pioneered the sector. Yet, most everyone noted the likes of Okta (NASDAQ:OKTA), The Trade Desk (NASDAQ:TTD) and Twilio (NYSE:TWLO) and more. The point here being that too much attention focuses on the wrong tickers. This suggests the froth will settle into disappointment for shareholders.
Cloud Stocks Currently on Cloud Nine: Salesforce.com (CRM)
Salesforce is the originator. They invented “the cloud” and forced everyone else to chase them into the ether. Back in the olden days, they faced down the behemoth Microsoft (NASDAQ:MSFT) and beat them at their own game. That doesn’t happen without strong leadership, and CEO Marc Benioff is as strong as they come. Now back at the helm of the company, I don’t think it’s a stretch to expect big things from him.
The stock is now at all time highs, and this is no coincidence. The real trade was to chase the upside from the breakout that started in May. The price action back then got squeezed into a point with higher-lows and lower-highs. It finally broke out of the range in an explosive manner. There’s still room to the upside to fill that target, but I believe it will go by way of the market in general. In other words, if the indices correct CRM stock will follow them lower as well.
Corrections are healthy after big moves, so even if it falls, that doesn’t change the overall bullish perspective. Rallies this big need room to breathe. CRM rose 75% from the March lows, so giving back some even up to half of it is totally acceptable.
The best way to trade Salesforce stock now is to buy-the-dip when it happens. There are entry opportunities at $185 per share or lower. This is where the buyers will start stepping in, so it would make sense to start nibbling on those occasions.
The best pivot for the past year is closer to $170 per share. But for that to happenm the stock market would have hit a serious pothole. I don’t see CRM going there all on its own. Selling puts or put spreads at support is also a viable trading strategy for those who can use options.
Teladoc (TDOC)
It’s about time we had an online service to answer our healthcare questions that don’t necessitate an urgent care visit. I can’t tell you how many times in my life I would have preferred a quick medical answer right from my phone. This is especially helpful for parents with young children who are very sensitive to their kids’ needs.
This virus crisis accelerated the success of Teladoc by strapping a rocket launcher onto its back. What’s truly impressive is not the surge in demand, but how management rose to the occasion to fill that demand. There were delays in the beginning, but those were acceptable growing pains after such a jolt to the business.
There’s no doubt in my mind that these habits will linger far past this crisis. It’s simply too convenient for Teladoc not to become part of everyday life for millions of new users. This is a bird’s eye view of the secular trends, but it really comes down to execution for TDOC stock. So far, management has clearly earned the benefit of the doubt on Wall Street, or else traders would punished the stock.
Valuation is an issue for a lot of investors, but in this case it doesn’t matter much. This is a growth company so I don’t worry about whether it’s profitable. The only metric that matters is the price-to-sales.
P/S is 28 which is high, but nowhere near outrageous. There are far worse and more egregious situations on that front. Management will report earnings late July, which will be their first update on operations under coronavirus. Reactions to earnings event are binary, so it’s hard to say how investors will manage expectations.
After such a big rally, it’s best to wait for a significant dip before buying into shares again. I look forward to an opportunity to get long closer to $200, or even $180. I know it sounds unreasonable to expect a 20% drop in this market, but they do happen. Amazon, the mother of all growth stocks, falls by 30% fairly often, and those are the best times to enter.
Patience has its rewards and it’s okay to admit that we missed a trade on these hot stocks. If you’re really itching to get long now, then I would suggest selling puts for better entry opportunities.
Zoom Video (ZM)
Zoom Video is the talk of the town, heck, the world, and the current poster child for cloud stocks. Main Street is using it almost on a daily basis, so it’s not a surprise we’ve seen user metrics explode. This got Wall Street very excited about ZM stock, and they continue to buy with vigor. But they’re perhaps too excited and therein lies the rub for this stock.
It is now selling at over 107 times its full-year sales, and that’s just too much hot air for me to accept. I find it silly to offer a business owner 107 years worth of their annual sales today for the privilege of owning their stock. That’s a recipe for disappointment.
I’m certainly not knocking the business model, as there is a definite need for such a productive service. Businesses especially will continue using it, as they have become accustomed to the service. But the onus is now on Zoom management to convert increased in user metrics into increased revenue. I’m eager to see how this will play out over the next two earnings reports.
So far, Wall Street is concentrating on the actual number of users rather than the increase in cost to support them or the revenue they aren’t yet generating. I’ve used Zoom extensively but I’ve yet to pay a nickel for it. And if they force me to pay I would switch because I do have many other free alternatives.
The competition is fierce and it would be stupid to ignore behemoth like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) just to name two. And who’s to say that Amazon isn’t lurking to join in with its version of an online meeting service.
Fans of the stock probably hate my opinion here but I am truly not knocking the company. The application is definitely a viable bullish thesis; my beef is with the price action pure and simple. Shorting it so far has been a hazardous activity, so if not long already, investors should sit it out and wait for dips.
Of the three cloud stocks noted today I have the most confidence in Salesforce because they are proven winners over time and through many tests. The other two, the proof is still in the pudding. If I were to rank them I would place CRM first, TDOC second, and ZM last.
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.
