Tuesday, October 05, 2021
If you’re relying on bulge-bracket Wall Street analysts to time your investments, just give up.
While many investors want to believe these hyped-up nerds enjoy privileged access to information that enables them to routinely outperform the markets, that’s patently untrue.
Sure, analysts do get access to management teams and unparalleled industry research to have the opportunity to make big bets on various business developments. But there’s no incentive for them to use this information.
What do I mean? Well, it’s a little known fact that most Wall Street analysts don’t own a single share of any stock they cover. And if you have no skin in the game, you’re only concerned about saving face, not being right.
Zoom Video Communications, Inc. (ZM) serves as the latest proof.
It also represents an opportunity for us to keep ignoring the analysts — and keep profiting.
Let me explain…
After months and months of obvious Zoom fatigue — and a 50% drop in the stock — JP Morgan’s Sterling Auty is finally advising caution:
“Listen, we still believe Zoom is a very good franchise with a tremendous amount of growth in its future, but we expect the market will need to rationalize a different level of growth post-pandemic into their valuation expectations.”
If you’ve been following Auty’s cues, you’re getting crushed. At a time when it’s been dead obvious you should be taking profits or selling short the stock, not buying more.
No special access or training required. All you had to do was look at the data.
Over a year ago, I warned about the “crazy disconnect in valuation and market size.”
Specifically, IDC estimated the entire market for video conferencing would be worth $43 billion in 2022 — and yet Zoom’s stock was already trading at $125 billion. More than double the size of the entire market, despite only having a fraction of that amount in sales.
Sorry. I don’t need a fancy Ivy-league education to figure out that math. But that wasn’t the only damning data hiding in plain sight…
You’ll recall in March, one of Wall Street’s largest employers officially signaled that demand would fall off for Zoom’s services.
I’m talking about when Citigroup Inc. (C) instituted “Zoom-Free Fridays.”
We couldn’t ask for a more obvious data point that once business conditions started returning to normal to any degree, everyone would start using Zoom less and less.
But fear not. Within a few months, management gave us an even more obvious data point when they announced an all-stock acquisition of call center operator Five9, Inc. (FIVN).
On the heels of the announcement, I shot straight with you, writing:
“Any time a young business does a major pivot into a new business line, it means a major growth problem is brewing.
And make no mistake — at $14.7 billion, Zoom’s deal for Five9 is a major move.
Shareholders are being lied to that the deal will enable anything close to the company’s early growth to continue.
And even if Five9 does deliver breakneck growth potential, it will be offset by massive erosion in Zoom’s core business.”
Guess what happened this week? Five9 shareholders knew they were getting a raw deal, overvalued shares of Zoom instead of cold hard cash, and they voted against the deal.”
Again, I can’t think of another more obvious data point that demonstrated that erosion in demand lay dead ahead — and in turn, shares were doomed.
Of course, nary a Wall Street analyst was warning about the stock as vehemently. No, sir. They were more interested in potentially earning investment banking business with their overly optimistic research coverage.
But that’s ok. If we get over the misconception that these analysts have some special profit-making powers and instead ignore them, we can keep profiting.
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Ahead of the tape,