3 Cloud Stocks That Are Leading the Nasdaq to Records

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Before 2020, virus alerts were mostly just found on on PC screens, but that all changed quickly this year. Covid-19 is tearing through the world like a storm, causing a tragic year on Main Street but an incredible year so far on Wall Street. First the global shutdown shook investor sentiment to its core and they sold everything in droves. The correction was sharp and record breaking. What happened next was unexpected — stocks rallied back to green and are still setting records. As of Friday even the Dow Jones Industrial Average had turned positive for 2020 albeit by a small margin. The Nasdaq has led the rally so far and by a mile — partially levitated by cloud stocks.

The index has not only erased the quarantine correction but made further gains. Today we consider trading three of those momentum movers.

In just a few months, the Nasdaq rallied 60% from bottom to top and has had five positive months in a row. Last week Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) went on a tear as investors chased the news that they were splitting their shares. This week it will be interesting to see if the chase continues as they start trading at their new levels. Experts have told us for decades that splits don’t matter, but now they have given up on that message and are reporting on how to join the chase.

Case in point CNBC’s Jim Cramer, who usually preaches the importance of “homework,” did a special on what stocks to buy for the prospects of splits.

Cloud stocks have contributed heavily to this rally because they earned the tag of Covid-19 stocks. The fear of the virus has restricted the movement of people. Some states are still ordered to be shuttered for business so people migrated to online for shopping, socializing, and even learning. The demand for the cloud exploded in mere months and the mass migration to the stocks that cater to it is ongoing. People all over the world are using Zoom (NASDAQ:ZM) or similar products to to everything.

Today we discuss three opportunities that present themselves from this new era of social distance. They are:

  • Salesforce.com (NYSE:CRM)
  • Pinterest (NYSE:PINS)
  • Etsy (NASDAQ:ETSY)

Cloud Stocks: Salesforce.com (CRM)

Cloud Stocks: Salesforce.com (CRM) Stock Chart Showing Potential Entry Zone
Source: Charts by TradingView

We will start with the company that invented “the cloud” and made it cool over a decade ago. Under the leadership of Marc Benioff, Salesforce.com has accomplished so much in such a short time. Last week, they flexed their muscles as they reported earnings. The stock rallied 30% in just one day after a massive beat-and-raise effort. What makes it special is that it did it from near an all-time high already. Clearly Wall Street cannot have enough of it, and CRM stock is still in high demand. They love it so much they kicked Exxon (NYSE:XOM) out of the Dow to make room for it.

Regardless of how great the story is, at these altitudes this not an obvious starting point for new investors. This doesn’t mean it’s a short either, but I am confident that there will be a better opportunity to get long this stock from lower prices. I can scour thousands of charts and none will have CRM’s current chart structure as the base for a lot more upside without a correction. This is clearly a trade where the buyers fear missing out on the next big thing. It is best to let the mania die down before investing here.

I respect what CRM has done but that’s not the whole story because the stock trades inside a stock market. Regardless of how good its story is, it can’t rally alone if the whole market is correcting. This is to say that there are extrinsic risks stemming from the state of the economy and its effect on the stock market rally in general.

I’m not calling to short Salesforce.com. Just practice a bit of patience before jumping in this late. A dip to $200 per share will be a decent starting point, and I’d add near $175 per share when it gets there.

Etsy (ETSY)

Cloud Stocks: Etsy Stock Chart Showing Potential Entry Zone
Source: Charts by TradingView

At the height of the virus, the leaders of the world decided to shut everything down. Everyone on earth had no choice but to quarantine for weeks at a time. We were all stuck at home, which made for an ideal setting to try new things. This played well into Etsy’s business model, since it provides an outlet for personal things. It is a great marketplace, and because it is virtual, its traffic increased exponentially.

Of the three picks today, ETSY stock has lost the most since its highs. But is still up 166% year-to-date which is more than quadruple the Nasdaq.

The company fundamentals are not horrible when you compare it to other Covid-19 stocks. It has a high price-earnings ratio, but at least it has earnings. Also the stock price is only 14 times its full year sales. These are modest stats relative to hyper-growth companies like Zoom or Shopify (NYSE:SHOP). This is to say that the company was well on its way to succeed anyway, this virus just gave it a shot of adrenaline.

When this happens, the risk is that Etsy may have pulled opportunity forward. Think of it like this — after a rush to hoard toilet paper, the demand under normal times plummets until the inventory is exhausted.

The good news is that the increase in use will create new habits that will be incremental and ongoing business. Simply put, the boost of energy from the quarantine may have pulled sales forward but it also created lasting customers.

Social distancing has become a way of life for a big portion of the population. Evidence of this is that almost every household has a few personalized masks next to the car key basket in the foyer. In fact some of those may have come from the collection that is available on Etsy.com, It was the first category that popped up on the site when I logged on for the first time yesterday. Own Etsy for the long haul but I prefer it from lower levels. ETSY stock has support here, but would make for a much better entry closer to $103 or $94.

Pinterest (PINS)

Cloud Stocks: Pinterest (PINS) Stock Chart Showing Better Base
Source: Charts by TradingView

The story for Pinterest is very similar to ETSY. In fact, all that we noted above applies here too. In addition PINS stock is even cheaper with 12 price-to-sales but no net earnings yet. However, these are companies on the move and “cheap” is not what investors should seek.

At this stage of the development, managements need to overspend to build their revenue pipelines. That was the specialty that made Amazon (NASDAQ:AMZN) so successful because it never stopped being a startup. I would give PINS a pass on that front for now.

The stock is still near its highs so the bulls may still be in charge. But it has a bad habit of experiencing let-downs after earnings. The reaction to those a couple of weeks ago was great but investors beware. It also did that last year, then about a month later it gave it all back. If this happens, the opportunity to start nibbling long on PINS stock starts around $31.00 per share, then adding more as it nears $29.

There is a high chance that it simply follows the action of the general markets. There the buyers are in complete control, so unless there is a sudden sentiment flip on Wall Street, investors should stick with PINS until it proves unable to deal with the competition — especially from whatever Facebook (NASDAQ:FB) brings.

Unfortunately they don’t ring bells at tops and bottoms but cloud stocks have rallied so far and in the face of horrid economic conditions. As a results, equities need a better baseline to build bigger rallies. There might be already too much hopium built into stocks these days — especially cloud stocks.

In February, we had the best economic conditions of all time and now we have the opposite. And in addition, now we have a mystery virus on the loose without a cure or a vaccine. I just don’t see a reason to rush in to buy stock at all-time highs with both feet unless to trade the short term price action.

Furthermore I fear that the stimulus money is coming to an end. Only then will we know what kind of shape is the U.S. consumer. This is important because consumer spending accounts for 68% of U.S. GDP.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/3-cloud-stocks-that-are-leading-the-nasdaq-to-records/.

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