There isn’t a soul on this planet that hasn’t suffered adversity this year. The pandemic has wiped out thousands of businesses. What’s more, millions of people are still out of work. And those who could work from home turned to telecommunication providers like Zoom (NASDAQ:ZM). Likewise, investors turned to Zoom stock.
However, recently Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and AstraZeneca (NASDAQ:AZN) gave people some hope with the news about their vaccines. That has gotten investors looking toward a post-pandemic future. But we shouldn’t forget about the market winners who emerged from 2020’s rubble.
Zoom has been the poster child of pandemic stocks. Over the course of this year, the demand for its business exploded. Now its stock is up over 550% year-to-date (YTD).
Essentially, the world needed to get online quickly and Zoom was there to help. Now, the stock has only recently taken a breather. Therein lies the opportunity.
Zoom Stock: Catching Falling Knives Is Risky Business
They say that catching falling knives is dangerous work on Wall Street. Zoom stock fits the bill now. Even though some of the pandemic fear has abated since March, people are still choosing to work remotely over in-person. The company’s business model exists for exactly that reason — and quarantine was the perfect extreme scenario for Zoom. Having a good product made it easy to take flight at an exponential rate.
The downside of the company’s pandemic boost, however, is the fact that it built up a lot of investors’ hopes. Now they are paying up for it, with management having to live up to the hype. On the charts, having such a sharply rising wedge usually creates weaknesses. So, one small hiccup could make Zoom susceptible to surprise corrections.
This happened recently — the stock fell 35% after reaching a peak in mid-October and now it’s trying to find footing. So, the opportunity now? Investors may be able to time an entry in anticipation of the rally resumption. But when a stock moves this fast, it’s hard to find easy openings. Naturally, there will be risk in those attempts.
Down 25% Doesn’t Mean a Blind Buying Opportunity
Zoom stock is now 25% below it’s all-time high of over $588, but it’s still generally 50% above its August levels. It could definitely fall further given the right circumstances. What’s important for the bulls, however, is to stay above $360 per share. Losing that could trigger a $40 bearish pattern from there.
That said, I am merely commenting on one scenario, not calling for it as the forecast. In fact, the more likely scenario is bullish. If Zoom stock rises above $450, it can quickly rally $50 more to fill the gap from the vaccine headlines.
However, there is a potential wrinkle coming from the good vaccine news. That’s right — the good news for humanity is temporary bad news for Zoom. Investors panicked out of the name on Nov. 9, when Pfizer made its announcement. That was an overreaction, but it only happened because the company was already vulnerable. The speed of the ascent was unnatural and weird stuff can happen on hiccups.
When stocks rise this fast, they create a lot of weak hands. Those investors are quick to push the sell buttons at the drop of a hat. But that is also normal — it’s the process by which a stock consolidates to build better bases for more upside. It rises fast, then needs to rotate ownership.
The Valuation Is Nuts — And That’s Okay
Valuation is not an asset to the bullish argument. In this case, it’s not tangible yet with a trailing price-earnings ratio of over 550. So, this stock is definitely valued in the eye of the beholder.
But also keep in mind that this is a hyper-growth company — value is not the parameter that investors should seek anyway. As such, don’t judge Zoom by it’s earning power because it’s spending a lot to grow a lot. The demand is huge and that is what’s important.
People will still need to work, learn and celebrate birthdays remotely for months. What’s more — even if the vaccines cause social distancing to fade — we’ve developed convenient habits that will stick forever. For years, society has chased the telecommuting concept. Now, the pandemic has forced the issue. And Zoom even has the first mover advantage. Therefore, Zoom stock is the obvious bet on that thesis.
Finally, on Wall Street, Zoom is now a cult stock and its fans are strong. Dedication like this makes it hard for bears to short the stock for too long. That’s another reason why this name could bounce back quickly.
How to Trade Zoom This Year
To catch the falling knife here requires one of two scenarios.
In scenario one, an investor needs to be looking to get into Zoom stock for a long time. That means they will need to tolerate potential setbacks along the way. All the signs now point to future success, so it’s definitely a valid thesis. It just requires patience.
The second scenario, however, has an active investor looking to trade into the swing opportunities. If you prefer that course of action, buy it above $450 or buy the dip near $360 with a tight stop. On the chart above, basically follow the green or red arrows. In the middle of August, I wrote about the upside chase opportunity and it played out extremely well.
If — for whatever reason — Zoom stock falls below $300, though, it would make for an excellent opportunity for anyone. The last earnings report was astonishing and soon management will have another chance to “wow” us. I expect good results.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
