Bubbles are easy to spot...
They are full-on frenzies. They happen in times when the market has lost its mind.
To be more specific... Stocks are in a bubble when there's no possible future that can support their current valuations.
We've written about bubbles before...
Back in November 2020, we pointed out a bubble that should have seemed obvious to most everyone... But folks were in frenzy mode and didn't want to listen to reason.
Here's what we wrote back then about Zoom Video Communications (ZM)...
It used to be that 10 times sales was considered a "nosebleed" valuation (as in, very high). But with the new crop of tech stocks, that seems to be closer to the norm. With Zoom at 83 times sales, it's priced 8 times higher than that lofty level.
Can Zoom grow into that valuation?
Zoom's sales have totaled $1.3 billion over the last year. But let's be generous and consider that it brought in $663 million in the last quarter. Multiply that by four and we'll give it revenue at an annual rate of $2.6 billion.
The goal here would be for Zoom to mature and eventually trade for 5 times sales. To justify its current $110 billion market cap, sales need to grow to $23 billion – that's nearly 10 times higher from here.
Will people spend $23 billion every year on Zoom's video conferences? The company's management believes the total addressable market ("TAM") is $43 billion. That sounds extraordinarily high to us (and management always fluffs up the TAM for a growth company).
At that size, it means video conferencing will bring in about as much revenue as Starbucks (SBUX) or Kraft Heinz (KHC). And even if it does, Zoom would have to own more than half the market to capture $23 billion of that $43 billion.
Not to mention that this pandemic won't last forever. At some point in the future, many companies will return to the office and many families will be allowed to travel and see each other again.
In total, we think Zoom's market value is pushing the limit... not just for what it's worth today. But for what it could ever be worth.
Zoom is in a bubble. Its investors are behaving irrationally.
Today, Zoom is only worth about $37 billion. Its stock has fallen nearly 80% since its 2020 high. Take a look...
It's often hard to be rational when everyone around you is making money on a stock that's surging. But all you have to do is ask yourself one question: "Can this stock ever grow into its valuation?"
If the answer is no, avoid that stock like the plague. Eventually the euphoria will die down and the stock will come back down to earth.
Investing requires rational thinking. And it requires common sense... Fall victim to irrationality and greed, you'll be in trouble.
The same is true in times of uncertainty and fear... much like we're seeing today. You need to understand risks in the market, but without reacting emotionally.
Those are the times you want a veteran who can look at what's happening in the world to help you make rational decisions to grow and protect your wealth.
Today, my colleague and Wall Street legend Marc Chaikin has a warning for you using rational thinking... According to Marc, the next 90 days could determine your wealth for the next decade. The message is so urgent that Marc is sitting down on camera at 8 p.m. to share all the details.
Marc is also going to share his No. 1 popular stock to sell immediately – think back to Zoom in late 2020. You'll get the name and ticker of that stock for free by attending Marc's event. You'll also get the ticker for his No. 1 stock to buy right now.
What We're Reading...
- Investors in Zoom Video Communications (NASDAQ:ZM) have unfortunately lost 62% over the last year.
- Zoom provides disappointing revenue forecast for first quarter and full year.
- Something different: Sony launches new PlayStation gaming subscription service to take on Microsoft.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 30, 2022