UDMY (Long) - Edutech reversal play

13 Nov 2023

Fundamentals

• Not my usual play, but I do like to tell myself that I have developed a keen eye for reversals. So let's see if this one works out
  
• Udemy is an Edutech firm with surprisingly good fundamentals, considering the stock price would probably be telling you otherwise
  
• Valuation is not extended (compared to the current market standards - P/S = 2.8), the sales growth is reliable and strong while the firm is nearing profitability
• The business carries high margins and if it remains on the current trajectory, it is bound to become a highly profitable firm.
  
• And as a bonus, it does not have any debt!
• The thing I like the most though is the support the stock is getting from the overall education sector. Look at the charts of DUOL or COUR (which I recently covered in another post) to see how strongly these stocks have been performing
  

Technicals

• Reversals are very tricky, but there is a couple of signals to always look out for
  
• The stock broke the series of lower lows and lower highs and is establishing a new higher high
• The price broke cleanly through all moving averages
  
• And it has done so on very positive news that carried the stock 30% higher. Most importantly, we can see follow-through in price; not collapsing higher or consolidating, but rather marching higher
  
• RSI is breaking towards new highs despite the stock being price-depressed and stochastics are showing a strong momentum
  
• I do not know if this trade lives up to the expectations, but this is how I would imagine an ideal reversal

Trade

• Putting on the trade is rather tricky, I am not going to lie. Hence why I have not put it on myself either
  
• The next support levels are unfortunately 10% away (the black line) and the stock price has not properly pulled back. A good sign of the underlying strength, but bad if one wants to enter the trade
  
• One option is to wait a bit but risk the trade running away from you. This is what I am going to choose because my own risk management would not let me enter the trade at this price.
  
• The other choice is to get in now. In that case, I am going to leave it to each and every one of you to pick your own spot for a stoploss. At this point, there is only one viable level that I can see, which is around the black line depicted on the graph
  
• By the way, a really good pick for a long-term investment if someone is interested in that
  

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