Trade Suggestions After Some Interesting Earnings Reports
From yesterday’s close to today’s open there has been a flurry of interesting late-season earnings reports. The most notable among them, or at least the most curious, came from Dick’s Sporting Goods (DKS), who roughly hit revenue expectations but missed on EPS by a wide margin. The initial reason given was “inventory shrinkage,” which is a polite way of saying theft, but it seems strange that this went from nothing to a huge problem in just one quarter. They have not mentioned it in an earnings report for nearly twenty years, but it was apparently enough of an issue in Q2 to result in EPS of only $2.82 versus expectations for $3.76.
The market clearly thinks something smells, as the stock is indicating an opening this morning around 20% below yesterday’s close. Presumably, things will be a bit clearer after the , but while this looks at first glance like an overreaction and therefore an opportunity for long-term investors to buy stock in a success story at a discount, something clearly went horribly wrong last quarter. And until there is a clear explanation and an even clearer plan to prevent a repeat, this is probably something best left alone.
Another company in that flurry of reports, Zoom Video Communications (ZM), who reported after the close yesterday, knows a thing or two about market overreaction. Their stock climbed from around $50 to a high of $588.84 as the pandemic gripped the world and working from home necessitated use of their video conferencing products. That was a classic case of traders seeing current conditions and trading as if they would always remain the same. They didn’t, of course. Competitors emerged, most notably Microsoft (MSFT) Teams, and the percentage of remote workers inevitably declined, and the stock collapsed as a result.
Interestingly, the management at Zoom didn’t fall into the same trap of believing that nothing would change. They kept hold of some windfall cash and set about some longer-term product development that would shift their focus from individual to corporate customers. This report indicates some success with that. They reported EPS significantly better than expected, largely on increased corporate business. Given that, it looks as if, just as the stock was massively overbought in 2020, it is now notably oversold.
That contention is supported by the numbers. ZM is currently trading at or below its pre-pandemic levels, but the world has changed since then, and those changes suggest long-term success for the company. According to research done by Hilary Silver and published online by the NIH, remote working accounted for less than 5% of days worked in pre-pandemic America, whereas even after falling off, that number was close to 30% in late 2022.
Yes, there is still the competition issue, but a study by the website emailtooltester.com reveals that Zoom is still the market leader in videoconferencing in the majority of countries around the world. Given that, does it make sense that ZM is trading at around the same price as in 2019 and early 2020 when the company’s addressable market has effectively increased by around 500%? Clearly not.
The problem is that ZM is as unpopular today as it was all the rage in 2020.
It popped on the earnings, as you would expect, but by the time the market opened had given back all of those gains and continued lower in early trading. That suggests there could be more selling to come, but this looks to be sustainable success, and at some point, ZM will reflect that. That makes the stock a good candidate for dollar cost averaging into a long position over the next couple of months, buying small amounts based either on time or on proximity to a few key levels such as previous support at around $61.50 and $60.50.
If that is not your style and you look for a simpler trade on the potential for a bounce, then I would wait for a challenge of $61.50, with a stop loss at around $60. However, if you do it, understand that ZM, having benefited from market overreaction three years ago, is now suffering because of the same thing. It is an old principle of trading and investing that everything returns to the mean eventually, and on that basis, ZM should recover before too long.
One word of warning, however. Another old principle of trading is that the market can stay illogical a lot longer than you can stay solvent, which suggests that despite all the logical reasons for a bounce, buying ZM is still a risky trade. That means that, whether with a short- or long-term view, it should be done in a disciplined way, with a stop at or just below $60 that you set in advance and stick to. With that proviso, buying ZM looks like a decent, risky trade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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