Zoom managed to produce a staggering 1000% return for investors in 2020 fueled by the global pandemic and consequent lockdowns around the world. At some point Zoom had a larger market capitalization than Boeing which finally resulted in some skepticism among potential investors. The stock finally started consolidating for almost 10 months after the huge run up in 2020 and many analysts have attributed this to countries finally easing their lockdown measures and allowing their people to get back to work, schools etc.
Now the important question is
Why has the narrative surrounding this stock changed? and why has wall street forgotten about this speculative trade? As I mentioned earlier, this could be partially due to legitimate concerns over the $100 billion dollar valuation of Zoom and investors are having a difficult time justifying such a high valuation with the global economy returning to normal conditions faster than expected.
As many of you already know, I’m a stock market technician and primarily focus on analyzing price behavior however, there are still a few important points I want to share with you regarding Zoom’s fundamental structure and its valuation.
There is lots of competition in the video communication industry making it even harder to justify a $100 billion valuation for Zoom. However, it doesn’t take too much intelligence to recognize that business is being conducted online more than ever and more and more people are starting to prefer to work, study and participate in business meetings online. Think about the amount of time, money and energy you save on commuting and the amount of money businesses save on infrastructure spending! Zoom is well positioned to capitalize on people and businesses wanting to do things online. They have done a fantastic job on branding and have established themselves as a leader in the enterprise video communication industry. Therefore, fundamental analysts could easily be underestimating the growth potential of Zoom going forward.
If you have been trading for long enough, you would know that fundamental traders have historically had a difficult time valuating and trading tech stocks with a promising growth potential. For example, think of Amazon, Netflix and Facebook and how they have managed to outperform year after year for the past decade while fundamental traders remain skeptical of their valuations. Tech companies are often extremely difficult to valuate primarily because their operations are not tangible for the most part, and they don’t require a massive infrastructure investment that some value companies such as Boeing do. In addition, their growth potential and demand for their products is even more difficult to predict. Therefore, I recommend mainly focusing on technical analysis and price behavior and not trying to analyze these tech stocks from a fundamental perspective unless you are truly an expert in the field. Now let us focus on analyzing Zoom’s price behavior before we miss another investment opportunity!
As you can see on the weekly chart, Zoom produced a 1000% return for investors in 2020 and reaching a high of ~$589 per share and then started trading sideways and consolidating for almost 10 months! Notice how the stock managed to maintain its 9-week exponential moving average or EMA 9 throughout that entire run up in 2020 which is impressive considering the speculative and uncertain nature of this stock.
When it comes to investing or longer-term position trading, you want to look for a stable uptrend with practically no downside volatility and Zoom certainly fits that criteria.
So how to trade this name?
As you can see on the chart, the price is finally attempting to break out of this 10-month consolidation zone and momentum indicators confirm this move. The stock has been steadily climbing higher for the past 6 weeks and the price has managed to get above the 9-week exponential moving average (EMA9) of $342.71 pointing to a possibility that a fresh and stable uptrend is emerging once again. If this breakout holds above the $340 level in the upcoming weeks, then I wouldn’t be surprised to eventually see $ZM trading around $800-$1000 in the next 12 months. If you are considering a position trade regardless of your time horizon, consider a hard or mental stop loss around the ~$330 level to avoid getting caught in a potential failed breakout attempt.