When your stock is already up 378% in the first 8 months of 2020, many may think that it has gone too far already. Don’t look now, but a day later, it’s up to 572%.
Zoom is a pretty catchy name if you are looking for a stock to hold, and the prospects of a stock you own zooming up in value is what investors’ dreams are made of. Only some dream this big, but holders of Zoom this year have had their dreams come true and then some in the year of the coronavirus.
One of the stocks that has clearly benefited from this pandemic is Zoom Video Communications, whose software has gone from relatively obscure to the full spotlight this year as COVID-19 has changed the way so many people communicate. Zoom’s video conferencing software has helped catapult the new normal, although their success has been anything but normal sized.
While a lot of stocks have taken it on the chin this year, with many well behind where they started 2020 at, the technology sector is having a great year overall. They did very well in 2019 as well, with the tech heavy Nasdaq putting in a 37% gain.
The S&P 500 has put in a modest 8% so far this year, thanks to a big boost from the technology sector, single-handedly saving them from a losing year. The Nasdaq, on the other hand, has already surpassed last year’s big number by gaining 41% in the first two-thirds of 2020, where the already very strong tech sector has significantly increased its lead.
There are some stocks that have simply zoomed a lot faster than even the tech sector averages, where the gains of even the Nasdaq look very pedestrian in comparison. Imagine having to wait a whole year for the value of your stock to go up by 40%, or 8 months for the Nasdaq to do it. If you are riding the rocket called Zoom, you can travel that far in a single day, as Zoom stock just did on Tuesday.
The $67 that this stock cost to start 2020 has now grown to $457 at the close of Tuesday’s trading, after Zoom’s earnings report had them doing considerably better than the analysts expected. When a stock as hot as Zoom has a great earnings call, it can beat the returns of both the S&P 500 and the Nasdaq in a single day, as Zoom zoomed up 41% more just on Tuesday.
As a general rule, the faster a stock is moving, the faster it continues to move. Zoom is a fast mover if there ever were one, and the further movement that it enjoyed on Tuesday was at warp speed.
Zoom Video Communications stock first hit the market as an IPO on April 15, 2019. It opened at $65 a share. The company had been around since 2011, and had done nothing but lose money up until this time, but Zoom remained patient and waited until they finally became profitable in 2019 to take their stock to the market.
Zoom’s first year in the market was a pretty rocky one, where investor enthusiasm pushed the stock price over $100 for a time, but by the time the year was done, it gave it all back and sat only up a tiny amount for the year once 2019 came to an end, going from $65 to just $67.
The stock did hold up though and never went below the low of $62 it closed their first day in the stock market at, where they still sat on the launching pad to start the year but still looked pretty solid as investors waited for it to get airborne again. Then, it blasted off to the stratosphere.
Zoom didn’t just start to take off when COVID-19 hit American shores and people started to shelter at home, as they started to lift off in the very early days of this pandemic, when it was just limited to Wuhan Province in China. Perhaps investors saw this coming, and if we remember back to those early days, while we did not expect the country to go into hiding the way they did, the prospects of Zoom Video getting a lot bigger fast was certainly in the cards.
Zoom has simply blasted off since the start of the year, right from day 1 onward. By the time the market crash hit in February, Zoom had already climbed from $67 to $98, a 46% gain in just 7 weeks, a gain that investors would be falling over themselves in delight if this was over a full year, well beating even the Nasdaq’s performance last year.
Then the big crash came. While stocks gave up a third of their value over the next 5 weeks, Zoom just kept zooming, and by the time the market crash bottomed in late March, Zoom was up 145% on the year.
While the coronavirus even scared Amazon’s stock for a time, it not only did not scare Zoom, it served as rocket fuel for it, propelling it further upward into the wild blue yonder. There wasn’t even any hesitation with COVID, as the market just kept bidding up this stock throughout this crisis, which has not only continued but accelerated.
As far as the earnings call goes that was behind this latest rocket booster firing, the only thing you need to know about it is that the market stood up and cheered. Zoom reported earnings of 92 cents a share, doubling the analysts’ expectation of 45 cents.
People have now put Zoom’s changing market value on a chart compared to how IBM’s market cap has moved since Zoom first came to the market, back when it was only at this $9 billion in April of last year, with IBM boasting a much bigger market cap of $124 billion. Don’t look now, but Zoom has now passed IBM, with IBM now down to their stock being valued at $110 billion by the market, compared to Zoom’s $130 billion.
Zoom’s revenue projections for 2021 are also up, and are expected to break the $2 billon mark. IBM had $77 billion of revenue last year, dwarfing Zoom in the way we would expect them to since they really are that big of a company. We love the idea that this will make some people who think that these things matter to stock prices even more startled, as they are made to confront their confusion even more than usual.
For IBM to double in value, this would require an exceptionally gifted genie, or decades, and even decades may be enough if we are talking about a real doubling in value net of inflation. Zoom can pull this off very quickly, and if the size of your company doubles this fast, the price of your stock can double very fast, even in just 3 weeks, as Zoom’s has just doubled its price of August 11.
Stocks Like Zoom Help Light the Way to What Actually Drives Stocks
Instead of just telling investors that stock prices go up just because people bid them up, if they insist on thinking fundamentally, they can still do that but need to project their thoughts well into the future, where we look at where Zoom started the year and where they might be in 10 years from now.
The key to getting this is to see the proportionality involved, and measure rate of change. Their getting this may help them transition away from their fundamental ideas, placing them at least in the future. This is at least more valid than looking at how little business Zoom does compared to IBM, or how few cars Tesla sells compared to Toyota, but it’s still wrong thinking.
It might be less wrong but it is still wrong. It still will serve to not only confuse but have us wanting to bet the wrong way, not betting with the crowd but thinking they can outwit them or be simply too afraid to play and watch some marvelous things unfold before their eyes from the sidelines.
The fact remains that the overwhelming interest in Zoom’s stock isn’t really grounded in any calculations of the future beyond where the stock is headed. If you have quadrupled your money in less than a year, you do not need to care about what happens in 2030, and this quadrupling puts money in our pocket now.
We’re not even sure why people care about even future earnings beyond seeing this as a marker to bet on, no more organic than the effect of the moon phases upon the stock market, where if people traded them, this alone would empower these effects to be very real. Otherwise, they are not. All factors that move the market do so completely subjectively, but the beauty is that we can just look at the way they value things without even needing to wonder why.
Those who have made a lot of money on this stock might wonder how this stock went up so much, and perhaps may come up with some rationalizations, but all we really needed to know, and all that matters, is that it started to become very popular very fast and that means a whole lot of momentum at work, and momentum by definition influence the movement of prices, where this momentum indicates a bias to continue in the same direction.
Stocks on the way up are bullish. Stocks that are really on the way up are really bullish. Stocks that rise at extreme speeds are extremely bullish. The faster a stock zooms, the more bullish it is.
Many are thinking that Zoom was overbought before Tuesday and is even more overbought now. Zoom may be as bulletproof of a stock as there is, not only the way it laughed at the biggest recession in almost a century, but how it fed off it and grew so much stronger.
We never can say a stock is overbought if people are still buying it, that the threshold is being reached while we continue to surpass. We need to be deciding these things on the fly, while they happen, not well after, and certainly not well before, with nothing of substance beyond our fear and confusion.
If we insist on trying to explain this, as we are transitioning more toward remote interaction in business and even in personal life to a certain degree, where we have now come to realize that video interaction is so close to the real thing and so much more efficient, this is not a trend that will be ending. We don’t have to be afraid in order to want to do business more remotely, as being smart is enough.
We have smartened up a lot lately, but could still stand to expand this more, much more in fact. Zoom will be waiting, and ready to keep growing as we rely on their industry-leading expertise to help us achieve these worthy goals.
We Need Both Understanding and Courage to Succeed
Zoom not only has technicals so good they do not look like they come from this planet, they even have very strong fundamentals on their side, a move that has not just been built on sand but on the most solid ground out there. This is a growth business, and if you want to grow your money, they do go together.
There is never a time where a stock is zooming and it’s too late. When a stock is tired, it will tell us, and when it is travelling 200 miles per hour like it has lately, it is screaming at people to get on board this bullet train, and many are still heeding the call.
Those who are more risk averse simply need to define their risk. There are many different ways to play these flyers, ones that travel this incredibly fast like this, and investors could have ridden this up all the way with ease, as it did dip but the steps forward have all been much bigger than the pullbacks this year with this stock, unlike last year where it vaulted ahead by 50% just to give it all back.
If you were on the wrong end of a move like this, like if you watched it go up from $65 to $100 last year and then decided to buy, and hung on to it all the way down to $65 and then dumped it, and were too afraid to jump back on, you could have lose 35% on this stock.
We should not be setting up straw men like this and take very foolish decisions like this in isolation and find this compelling enough to step on a pile of money and not notice. The most undefined of risks can be plenty enough to turn heads away, to try to conjure up fears and then have us acting stupidly and seeing this apparition stare us down.
Those who bought at $100 and kept it have been well rewarded, with it at $457 now, and you could also have owned this at any time prior to Tuesday and hung on to it and be up at least 40% if you only owned it for one day and much more than that if you got in earlier.
People who get spooked by big runups really don’t think very much about the odds of these plays and this is why they are scared, and almost all fear arises out of ignorance. People who have stayed out of the Nasdaq and have gone with the S&P 500 this year because the Nasdaq scares them so much need to sit down and figure out what the odds and ramifications of what they fear so much happen to be, and see themselves conjuring up demons like the collapse of Zoom if they get in now and ride it down.
Make no mistake though, Zoom is a lot riskier than your average stock riskier than most of the good ones. The only ones riskier are the bad ones though, the ones that people want to give a hug to, like IBM for instance. If you don’t want to lose, picking a loser runs completely counter to your purpose.
While Zoom has risen from $65 to $457 in the last 16 months, IBM has dropped from $140 to $123. If we were back in 2013, you could have bought IBM for over $200 a share, and become exposed to the displeasure of being down by 43% for the over seven years while this turkey became more and more chilled.
This is what you call real risk, with the potential to go down being much higher and the potential to go up being much lower. Even as they stand, IBM is the riskier of the two because both can get punched right now, but IBM is a far older and feebler fighter when they hit the canvas, where Zoom is a lot younger and have a lot more vim, and most importantly, they have a much brighter future, like a street light lights things up versus a flashlight in the dark.
The future is ours if we dare to seek it, and big profits from stocks with a bright future can be ours if we dare to seek them. Anyone who has or is still willing to choose IBM over Zoom at any point along the way, including now, need to sit down with themselves and ask many questions.
We can never just look at drawdown potential and let our fear of this be our guide, and if we really are afraid of crossing this road, we need to realize that we can just dare to open our eyes and look at the traffic. If you are in a trade and you get scared, it’s fine to step aside, as at least you won’t be doing this during the big moves and you’ll be worlds better off with a stock like Zoom doing this than by clinging to stocks that are vastly inferior in every way, like IBM and many others.
Just imagine how much stocks could go up if less people were afraid. Less are becoming afraid already though, and we’re seeing this manifest with stocks like Zoom. Just like in life, investing rewards us according to our courage, where courage alone isn’t enough but without it even the best ideas will fail. As the market becomes less afraid, courageousness gets rewarded more, like with Zoom and other hot stocks this year, and fear gets punished even more as the size of these unrealized gains grow. Courage is becoming even more important now.