This year will be known in history as the great tech stock rally. Technology came to the rescue when the world faced one of its biggest crises since the Great Depression. As the pandemic confined people to their homes, it was the technology that kept the economy running. Every segment of the population used video conferencing, cloud services, digital payment, e-commerce, e-learning, and other types of services. Tech stocks that catered to the stay-at-home culture delivered spectacular returns…
The technology industry still has immense growth potential. While a new company can see explosive growth, an old company that lagged can turn the tables with a new product. For those who are familiar, Advanced Micro Devices (AMD) made a comeback from near bankruptcy in 2015 to overtake chip giant Intel (INTC) in 2020 with its Ryzen processors. During this period, AMD stock surged from less than $2 to $95.
There are very few game-changers like AMD that have the potential to maintain their unprecedented growth. Most growth stocks land up to be a one-off rally followed by years of decline. The pandemic paved the way for some stocks. They gained overnight and rallied to unprecedented levels.
The next chapter in the pandemic rally
But the tables are turning as the calendar changes the year and Pfizer’s (PFE) and Moderna’s (MRNA) vaccines come to the market. These vaccines bring hope that the pandemic era will come to an end. Tech stocks saw a correction on the vaccine news. The ones that could sustain their sky-high valuations went back in the green, while others failed to recover from the vaccine news-led correction.
Next year will see the market react to vaccine uncertainties. It is still unclear if the vaccine can stop the virus spread, or if we would have to spend another year at home.
Zoom Video Communications, Inc. – (ZM – Get Rating), Splunk Inc. (SPLK – Get Rating), and Stamps.com Inc. (STMP – Get Rating) made new highs in the pandemic rally between April and September. But they witnessed a steep fall on November 9th, when the vaccine news was announced. To date, they haven’t recovered to their November 6th price level. This rings an alarm that the three stocks might have reached their peak and may not surge in 2021.
These three stocks are still trading at very high valuations as investors have priced in their high growth expectations. This has limited their upside potential. They might witness a slowdown in revenue growth in 2021, which could lead to more negative gains. Hence, it would be good to avoid buying these stocks next year.
ZM needs no introduction. You or someone in your family might have used this app to attend a class, a meeting or conference, or catch up with family and friends. This nine-year-old company went public in April 2019 and rose to fame during the pandemic. Its stock rose fivefold in the pandemic.
ZM had a blockbuster year, with its revenue surging 367% year-over-year to $777 million in the third quarter of fiscal 2021. It was not just revenue, but profit also rose almost 90% to $198.4 million. The company raised its fiscal 2021 revenue forecast for the third time from $622.7 million to $2.5 billion, representing a 314% increase. Replicating this type of growth next year will be a Herculean task, especially as the economy starts to normalize.
While ZM CFO Kelly Steckelberg remained optimistic about the company’s growth, she cautioned investors that the impact of the pandemic remains unknown. Analysts are being cautious and estimate that ZM’s revenue will surge 38% next year. This growth rate doesn’t justify the stock’s 60 times sales per share valuation. If its growth rate decelerates significantly in 2021, the stock could plunge.
Hence, ZM is rated a…
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