Yes, shares in Zoom Video Communications (ZM) soared during the coronavirus emergency. But post-pandemic, what’s the outlook for Zoom stock?
Zoom stock has been volatile as investors weigh a surge in second-wave coronavirus cases versus positive vaccine news.
“Zoom has become a battleground stock following strong 2020 performance and questions on return-to-normal impacts,” Baird analyst William Power said in a recent note to clients.
When the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s continued success. Another will be its ability to convert free users into paying subscribers.
Customer turnover is a risk. According to Morgan Stanley, Zoom garners about 50% of revenue from monthly payers. Zoom aims to convert monthly business subscribers to annual contracts.
Zoom Stock: Customer Retention Key
ZM stock slipped on October quarter results as the size of its beat and raise moderated from earlier coronavirus-driven boom quarters.
“Zoom reported solid Q3 results that meaningfully outperformed guidance and consensus, though by a meaningfully lower magnitude, as the company now has a better grasp of underlying retention dynamics,” RBC Capital analyst Alex Zukin said in a report to clients.
With $1.9 billion in cash on its balance sheet, ZM stock has plenty of dry powder to make acquisitions that provide technology or talent.
Amid Covid-19, demand for Zoom videoconferencing software has surged as businesses told employees to work from home. Zoom morphed into a social phenomenon as making video calls became routine for consumers to keep in touch with family and friends. Distance learning as schools re-opened and telemedicine also boosted demand for Zoom Video’s cloud-based services.
ZM stock bulls argue that video calling is here to stay and will play a much larger role in businesses, schools and everyday lives. Trouble is, Zoom rivals also think it’s a big market opportunity, and they don’t want Zoom to dominate.
In the business market, pre-coronavirus rivals included Cisco Systems (CSCO), Microsoft (MSFT), LogMeIn and Fuze. Alphabet‘s (GOOGL) Google, Facebook (FB) and Verizon Communications (VZ) have pushed into the market, aiming to derail Zoom’s torrid growth. Microsoft Teams collaboration tools has launched free trials targeting Zoom users.
On the consumer side, Zoom also faces stiff competition.
Zoom rolled out end-to-end encryption to address privacy concerns for free and paid users on Oct. 26, in a move to set itself apart from rivals.
ZM Stock: The Ma Bell Of Video Calls?
Zoom’s cloud-based software sets up video calls, with chat tools also available. Also, customers can easily share content.
A “Zoom Meeting” refers to a videoconferencing session hosted on its cloud infrastructure. During the Covid-19 crisis, Zoom upped investments on computer servers as demand surged.
One key to Zoom’s success has been a “freemium” business model. Zoom’s basic video-calling package is free.
Zoom puts limits of the number of participants in a group call and the length of meetings. Often company management learns about Zoom’s software after an employee reports a positive experience. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.
Many companies like Zoom tools because they usually don’t require support from tech staff.
At the Zoomtopia user conference in mid-October, Zoom management didn’t update financial goals except for raising long-term operating margin targets to 25% from 20%. Also, the company introduced “OnZoom.” It’s an online event platform with paid admission.
Cost Of Zoom Video Business Plans
Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats. Early on in the coronavirus crisis, Zoom offered online coupon codes with discounts.
Zoom Phone, a cloud-calling product rolled out last year, lets customers set up group internet phone calls without video. In addition, Zoom Phone competes with products from Cisco, Avaya and RingCentral (RNG).
Zoom cross-sells the Zoom Phone tools to business customers that already use its Meetings software. At Zoomtopia, management said there are 5,800 paid customers with more than 10 employees using Zoom Phone.
Chief Came To U.S. In 1997
Eric Yuan, Zoom’s chief executive and founder, came to the U.S. in 1997. He started out with WebEx Communications and eventually became its vice president of engineering.
Cisco acquired WebEx for $3.2 billion in 2007. Yuan then became Cisco’s corporate vice president of engineering for collaboration software. Yuan formed San Jose, Calif.-based Zoom Video in 2011.
Zoom, and its stock, face stiff competition from Cisco, Microsoft, Google and others. But Zoom Video has built up alliances.
Salesforce.com invested in Zoom stock prior to its IPO and reaped big gains. However, Salesforce recently sold off all of its shares in Zoom Video.
However, Zoom Video is forging new deals in the enterprise market, such as one with software maker ServiceNow (NOW).
Zoom Stock Fundamental Analysis
Revenue growth decelerated in Zoom Video’s first four quarters as a public company, then skyrocketed in the April 2020 quarter amid the coronavirus crisis.
The company’s July-quarter earnings and revenue also blew past consensus estimates.
Zoom said October quarter earnings catapulted 1,000% to 99 cents a share on an adjusted basis from a year earlier. Revenue soared 367% to $777.2 million, the company said.
Analysts projected Zoom earnings of 76 cents a share on sales of $694 million for the period ended Oct. 31.
Zoom Video does not break out paid subscribers in financial reports. The company said it had 433,700 business customers, each with more than 10 employees, as of the quarter’s end on Oct. 31. That’s up from 370,200 in the July quarter.
Meanwhile, businesses with fewer than 10 employees accounted for 36% of revenue in the July quarter.
For the current quarter ending in January, Zoom forecast revenue of $808.5 million vs. analyst estimates of $730.1 million. Zoom said it expects adjusted profit of 78 cents at the midpoint of its guidance vs. estimates of 66 cents.
For customers with one to 10 employees, monthly renewals are expected to slow as the economy reopens and shelter-in-place orders lift. There’s expected to be less turnover of larger customers.
While paid consumer subscribers are important, the company’s roots are in the enterprise market. Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.
ZM Stock Historical Performance
The Zoom initial public offering in April 2019 raised $752 million, with shares priced at 36. ZM stock popped 72% on the first day of trading.
Zoom stock popped again on June 6, 2019, after the company’s earnings and guidance topped expectations. It hit an intraday high of 107.34 on June 20, up 198% from its IPO price. But, by late June, ZM stock consolidated as some analysts questioned Zoom’s lofty valuation.
Zoom stock formed a cup chart pattern over nearly eight months, hitting a low of 60.97 on Oct. 23 2019, down 43% from its all-time high.
ZM stock’s relative strength line began to improve in January, before the coronavirus outbreak.
Zoom stock broke out on Feb. 18 from a cup-with-handle buy point of 93.40 as the coronavirus pandemic began to spread globally. ZM stock soared in March as the corporate shift to work-from-home boosted demand for its video-calling app.
Shares retreated in early April amid reports that hackers were breaking into Zoom meetings. The company added new security features to thwart the cyberattacks.
ZM stock weathered the bad publicity over “Zoom bombing” on video chats. The stock popped in late April when it disclosed that daily active participants had reached 300 million — counting some participants multiple times per day.
By May, Zoom Video became a cultural phenomenon.
ZM Stock Technical Analysis
On a weekly chart, Zoom bounced off its 10-week moving average in early August. The 10-week moving average often provides a new entry after a big run-up and stocks take a breather.
The Zoomtopia user conference in October, meanwhile, received favorable reviews from analysts. Shares hit an all-time intraday high of 588.84 on Oct. 19.
ZM stock owns an IBD Relative Strength Rating of 94 out of a possible 99.
In addition, Zoom stock holds an Accumulation/Distribution Rating of D-plus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
Zoom Stock: Is It A Buy Right Now?
However, ZM stock in late October sent sell signals. For one, it retreated more than 8% from the high-tight-flag buy point of 529.84.
In addition, Zoom stock dropped out of the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.
Shares broke well below their 10-week line in huge volume, also a sell signal. They then fell on its third-quarter earnings report amid high expectations.
Zoom stock ended 2020 up more than 400%. But shares have retreated over 40% from its intraday high of 588.84 set on Oct. 19. Not many stocks claw back from a correction that deep.
Shares now are approaching its 200-day moving average. If it falls below, that would be another bearish sign.
For technical reasons, ZM stock is not a buy. Investors should wait for a new base to form before taking a position.
Zoom Video is only one of many software growth stocks to monitor as “digital transformation” projects gain traction. In addition, there are many large-cap technology stocks growing at a fast rate.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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