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Zoom Video Stock Isn’t a Buy the Dip Opportunity Yet

While the COVID-19 pandemic has proved to be a boon for Zoom (ZM), the stock fell sharply following the positive news related to the development of a coronavirus vaccine. This has raised a question about the company’s capacity to sustain its performance after the pandemic has ended; will ZOOM surrender to stiff competition from established players?

Founded in 2011, the video-first communications platform Zoom Video Communications, Inc. (ZM) had stellar performance this year due to the skyrocketing demand for remote conferencing amid the stay-at-home requirements of the coronavirus pandemic. The company has become almost a necessity as several businesses have shifted to virtual communications to facilitate doing business. Classes are being held remotely, and people are using the platform informally to catch up with friends and family. As the demand for the platform increased at an unprecedented rate during the pandemic, the company also faced security issues with so-called Zoom-bombings where uninvited users intrude on or “bomb” meetings to annoy or harass invited meeting members.

While the stock has gained 499.4% so far this year, it dipped following the positive news around the coronavirus vaccine. As the economy gradually recovers, it remains to be seen if the company will be able to retain its accounts with small businesses and larger corporations. Also, there are concerns related to ZM’s ability to maintain its lead in the post-pandemic world. This uncertainty, along with several other factors, has led our proprietary ratings system to rate the stock as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates ZM:

Trade Grade: C

ZM is currently trading lower than its 50-day moving average of $456.16 but above its 200-day moving average of $350.59, indicating that the stock is neither in an uptrend nor in a downtrend. The stock’s 18.5% decline over the past month reflects a short-term bearishness.

The company delivered yet another strong performance for the quarter ended October 2020. Revenue increased 366.5% year-over-year to $777.2 million. Customers with more than 10 employees have increased roughly 485% year-over-year to 433,700. Non-GAAP net income increased 1079.4% year-over-year to $297.2 million and Non-GAAP EPS increased 1000% year-over-year to $0.99.

Last month, Gartner named ZM as a leader in the 2020 Magic Quadrant for Meeting Solutions. It is also the first year the company qualified for inclusion in the Gartner Magic Quadrant for UCaaS. Also, a couple of months ago, ZM announced its new end-to-end encryption (E2EE) which is now available to all users globally, for meetings with up to 200 participants.

ZM and Lumen Technologies Inc. (LUMN) partnered in September to deliver an enhanced collaboration experience. Shares of ZM fell sharply following the positive news of the coronavirus vaccine, however, because the news was interpreted by some investors as a threat to demand for ZM’s videoconferencing service as the economy goes back to normal and stay-at-home behavior declines.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, ZM is positioned unfavorably. The stock is currently trading 30.7% below its 52-week high of $588.84, which it hit on October 19th.

Zoom went public in March last year and made a strong debut on the tech-heavy Nasdaq. ZM was profitable even before the pandemic and received a massive boost due to the pandemic as users started using the company’s platform much more frequently. However, it remains to be seen if the company will be able to maintain this edge in the wake of the pandemic because competing platforms are being launched by several tech leaders.

Peer Grade: D

ZM is currently ranked #27 of 54 stocks in the Technology - Services industry. Other popular stocks in the technology-services group are TTEC Holdings, Inc. (TTEC), PagerDuty, Inc. (PD), and Flex Ltd. (FLEX).

On a year-to-date basis, ZM has gained 499.4%, beating the returns of TTEC, PD, and FLEX, which gained 81.4%, 74.6% and 33%, respectively, over this period.

Industry Rank: D

The Technology-Services industry is ranked #113 of the 123 StockNews.com industries. The companies in this industry provide varying services to businesses worldwide, namely services to resellers, retailers, and original equipment manufacturers, distributing information technology (IT) products, and providing supply chain and mobile device lifecycle services.

While this industry received a boost due to the unforeseen pandemic, some investors have been switching from tech stocks to companies within such sectors as infrastructure and manufacturing that are expected to flourish after the economic activities returns  to normal with the arrival of coronavirus vaccines.

Overall POWR Rating: C (Neutral)

Despite reporting a strong quarter, ZM is rated “Neutral” due to its slowing of growth, and uncertain outlook as determined by the four components of our POWR Ratings system.

Bottom Line

Many stay-at-home stocks dipped following the positive news related to the coronavirus vaccine and ZM was no exception. Even though ZM reported impressive earnings, it is uncertain if the company can convert its free users into paying subscribers. Moreover, the company also faces stiff competition from established leaders in its field.

ZM has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $814.27 million for the current quarter ending January 2021 indicates 332.5% growth over the same period last year. Its EPS is expected to grow at 3.1% in 2022. Moving forward, we believe it is wise to take a cautious approach to buying this stock as the company is expected to grow at a slower rate post pandemic.

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ZM shares were trading at $411.65 per share on Tuesday afternoon, up $3.80 (+0.93%). Year-to-date, ZM has gained 505.01%, versus a 16.64% rise in the benchmark S&P 500 index during the same period.



About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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