Risk-taking investors who think Zalando's stock plunge in recent months has been exaggerated may now consider investing in the stock. With discount certificates, the risk of buying shares directly can be significantly reduced.
Online fashion retailer Zalando's stock plummeted until June 24, 2022, when it hit a 12-month low of EUR 20.94. Despite profit warnings and reduced forecasts, the share was able to stabilize afterwards. In the past few days, the share fell to its current level of around EUR 22.60 in line with the weak overall market.
Although the slump in consumption and inflation had a negative impact on the company's sales and profit development in the second quarter, management plans to return to the growth path. Since Zalando was able to meet the analysts' greatly reduced expectations, experts with price targets of up to EUR 48 (UBS) reiterated their buy recommendations for the share.
The investment idea
For investors who only forecast limited downward potential for the Zalando share after the sharp price declines, but who also want to generate positive returns in the event of a further drop in the share price, an investment in discount certificates could be an interesting alternative to buying shares.
Discount certificates enable cheaper entry into the share and reduce the risk of direct share purchases. On the other hand, the return potential of discount certificates is limited in contrast to the unlimited profit potential of equity investments.
The way it works
If the Zalando share is quoted at or above the cap that defines the highest payout amount of the certificate on the valuation day of the certificate, then the discount certificate will be redeemed at the end of the term with its maximum amount of 20 euros.
The key data
The Morgan Stanley discount certificate (ISIN: DE000MD79ZJ6) on Zalando shares has a cap of EUR 20. The valuation date is June 16, 2023, after which the certificate will be redeemed five business days later. With the Zalando share price of EUR 22.60, investors could buy the certificate for EUR 16.60. The certificate is therefore 26.55 percent cheaper than the share.
The chance
Since investors can currently buy the certificate for EUR 16.60, it enables a gross return of 20.48 percent (=27 percent per year) over the next nine months if the share price is above the cap of EUR 20 on the valuation date.
The Risks
If the Zalando share is quoted below the cap of EUR 20 on the valuation date, the certificate will be redeemed at the closing price of the share determined on the valuation date. If the share price on that day is below the purchase price of the certificate, i.e. below EUR 16.60, then the investment will cause a loss.
This article does not constitute a recommendation to buy or sell Zalando shares or investment products based on Zalando shares. No liability is assumed for the correctness of the data.
