It is true that the Fed’s recently re-adopted zero rate policy and stimulus are distorting financial markets. Interest rates are like gravity to financial assets. The lower the rate, the higher asset prices go and vice versa. As a result, stocks in general tend to ignore the economic reality right now. Among the companies trading at obscene valuations is Veeva Systems.
Veeva provides industry-specific cloud-based software solutions for the life sciences industry. And while the company is indeed growing profitably, its profits and growth rate cannot justify a $35 billion market cap. The stock’s price of ~$237 a share translates into a P/E ratio of 120. If that is not overvalued enough, Veeva trades at 32 times its fiscal 2020 sales.
Nosebleed Valuation Spells Trouble for Veeva Investors
These ratios suggest Veeva Systems is not just overvalued. They mean it is actually in bubble territory. However, a company can remain obscenely overvalued for a long time. In order to find out what is left of Veeva’s uptrend, we need a different approach.
The weekly chart above allows us to take a look at Veeva’s entire surge from an Elliott Wave perspective. Turns out, it can be seen as a five-wave impulse pattern, labeled 1-2-3-4-5, where the five sub-waves of wave 3 are also visible.
This count means the recent vertical rally is part of the fifth and final wave. According to the Wave theory, a three-wave correction follows every impulse. Once wave 5 is over, we can expect a major correction to erase all of its gains and drag Veeva back to the support of wave 4.
The precise end of wave 5 is nearly impossible to pinpoint. We suppose the bulls’ optimism can even lift the stock to the $300 mark soon. However, holding Veeva stock is not worth the risk as a 50%+ decline lurks around the corner.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!