Back when Nasdaq.com had a comments section for articles, I quickly learned something about writing for the internet. There are some people who read the just headline of a piece and promptly form their opinion about what the author is saying, then attack said author with gusto. For that reason, let me make it clear in the first paragraph of this piece: I am not saying there is a problem with Zoom's (ZM) earnings, which were released yesterday. Far from it. They were spectacular.
But the massive beat does contain a lesson for investors.
The problem is best summed up by my wife. She was watching a financial TV show that was discussing the results, and when it was said that Zoom earned a lot more than expected, her response to the TV was “No s---, Sherlock!” To anyone not caught up in the minutiae of market analysis, being told that Zoom knocked it out of the park last quarter is about as surprising as being told that the Pope is Catholic.
And yet the adjusted EPS of $0.92 is over 170% higher than the expected $0.34. How does that happen with such a high-profile stock with such an obvious story?
I am not saying that I would have done a better job than the analysts whose best efforts formed the basis of the consensus opinion. I’m sure I wouldn’t have, because estimating revenue and earnings for such explosive growth is just about impossible. And if the highly paid, highly focused, and very smart analysts at the Wall Street firms have no chance of getting it right, what chance do we, the investing public, have?
The short answer is that we have none. Recognizing that is important if we are considering a “story stock” such as Zoom.
I am sure there are a lot of people who look at the above chart for ZM and think that it is all massively overdone. That would seem to be a logical reaction. After all, the stock has, if you include this morning’s massive jump, gained just over 300% in the five months since I wrote this piece, which mentioned it as a potential long-term beneficiary of the current economic disruption.
The thing is, though, if you looked at the YTD chart for the stock on the day I wrote that article, the only logical conclusion then was that it had been overhyped and overbought and was collapsing back to its “real” or “logical” level:
Sometimes a story is just way more powerful than logic, or our perception of reality.
A good example would be another high-profile, “story” stock, Tesla (TSLA). When that stock jumped so steeply after releasing earnings in February of this year, reality and logic would have told you that buying at those levels was crazy. I mean, look at the chart up to the day after that release:
However, if you look at the numbers of the vertical, price axis, you will see that that would have meant buying TSLA at the “crazy” split-adjusted price of around $150 and your trade would, as of yesterday’s close, be showing a 7-month profit of well over 200%.
So, when you look at the massive beat by Zoom and the chart for the stock after this morning’s surge, don’t let it put you off the stock. A retracement after such a massive move would be no surprise, as there will be some profit taking, but that has no bearing on the long-term prospects for the company or the stock. With ZM, growth in revenue and earnings is exponential and can continue to be that for some time. That means that growth in the stock’s price can be the same, no matter how much that looks unlikely to even skilled analysts right now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.