On surface level, health technology specialist Tempus AI (NASDAQ:TEM) has the makings of a meme stock with teeth. For one thing, it’s an artificial intelligence play, utilizing big data analytics to create precision medicine services (including diagnostics) for oncology, cardiology, radiology and depression. Second and perhaps most importantly, TEM stock received the nod of approval from former House Speaker Nancy Pelosi.
Love her or hate her, one attribute enjoys robust consensus: Pelosi, as The Economic Times mentioned, is an “ace investor.” It’s also not just about the enterprises that she supports. Rather, she also made waves for selling Nvidia (NASDAQ:NVDA) at a rather opportune time — as in before the DeepSeek disruption. Simply put, the lawmaker has a knack for understanding the ebb and flow of the equities arena.
So, when the former Speaker placed a not-insignificant call options wager on TEM stock last month, momentum erupted. Over the trailing one-month period, TEM has gained almost 51% of equity value. Further, pre-market activity indicates that sentiment could skyrocket even higher.
On a broader level, the enthusiasm is more than justified. According to Grand View Research, the global AI in healthcare reached a valuation of $19.27 billion in 2023. Experts project that the segment could expand at a ridiculous 38.5% compound annual growth rate (CAGR) through 2030. If so, at the culmination point, the sector could be worth $187.7 billion.
At the moment, TEM stock carries a market capitalization of $9.69 billion. Presumably, there’s a lot of growth available. Still, investors will want to exercise caution.
In particular, despite the projected impressive growth that analysts project for Tempus, the enterprise carries a rich premium. For one thing, the company doesn’t generate earnings as of yet. Second, TEM stock trades at a lofty 13.91X trailing-12-month revenue.
In sharp contrast, the broader healthcare ecosystem doesn’t run a sales multiple greater than 4.77X. So, TEM stock is overvalued for what it is. Should the euphoria die down, a severe correction could materialize in a hurry.
One element that prospective investors must consider regarding TEM stock is that as a publicly traded entity, it’s quite young. Thanks to its initial public offering held last June, not much pricing data exists for Tempus AI. Therefore, statistical assessments must be taken with a grain of salt.
Simultaneously, I don’t think the statistical argument can be ignored altogether. With the available data we have so far, there’s only a 45.45% chance that a position entered at the beginning of the week will be profitable by the end of it. Over a four-week period, the long odds actually improve, albeit slightly to 46.67%.
Either way, that’s not enough to warrant a heavy bullish or bearish bet.
Now, it must be said that when TEM stock moves, it moves. Last week, shares gained 15.66%, above the median positive-week return of 14.06%. However, one week or five sessions following a weekly gain of 10% or greater, the odds of a positive return is only 50%. Over a four-week period under the aforementioned dynamic condition (i.e. weekly gain of 10% or greater), the long odds slip to 33.33%.
Definitely, such an outcome doesn’t favor a bullish transaction. However, I’m not a big fan of going bearish due to the limited data available to make truly educated decisions. So, what does one do?
For people who are dead-set on trading TEM stock, perhaps the easiest multi-leg options trade to consider is the straddle. This strategy involves buying a call option and a put option at the same strike price.
Assuming that statistical trends play out relatively predictably — and that’s a huge if — there’s a chance that the third week following an extreme-greed event could see unusual volatility. If so, TEM stock may rise to a high of $77.12 or fall to a low of $50.08.
One compelling idea to consider, then, is the $62 straddle for the options chain expiring Feb. 21. Again, this transaction simply involves buying the $62 call and buying the $62 put. Effectively, this trade sets up two profitability zones: a north endzone and a south endzone.
Invariably, the trader doesn’t care where the stock goes, so long as it does so with gusto.
Despite the current excitement surrounding TEM stock, it’s worth noting that the timing of such vehicles matter. For example, up until Monday, if you had bought Tempus AI exclusively on Aug. 23, 2024, you would be in the red. Therefore, it’s critical to pick your battles wisely.
Unfortunately, neither the bulls nor the bears have a confidence-inspiring edge. Therefore, I’m not interested in a directional wager. If push came to shove, I’d rather trade the volatility — and such an approach is arguably the easiest with a straddle.