Zoom Stock: Pandemic-Era Gains Likely to Fade

The post-Covid recovery has been anything but positive for Zoom Video Communications (ZM) stock. 

In 2020, investors excited about the enterprise communications platform’s unexpected tailwind aggressively bid up its shares. Trading for around $115 per share pre-outbreak, it peaked at $588.84 per share shortly before COVID-19 vaccines began to obtain Emergency Use Authorization (EUA). Since the start of the vaccine rollout, shares have fallen by more than 52%.

After this decline in price, some may see this as an opportunity to “buy the dip,” ahead of this growth stock making a rebound.

The problem? After seeing mass adoption of its service, revenue growth is slowing down. Even worse, earnings growth is expected to be non-existent in the next fiscal year.

A slowdown in growth could in turn mean a continued move to lower prices. Its forward price-to-earnings, or P/E, ratio of around 57.6x may not be sustainable.

With the high chances it gets knocked down again due to valuation compression, I am bearish on the stock at today’s prices. (See ZM stock charts on TipRanks)

ZM Stock: Growth Story Slowing

As seen from its most recent quarterly results, Zoom Video may be continuing to grow on a year-over-year basis. For its fiscal second quarter (ending July 31, 2021), sales and earnings were up 54% and 65%, respectively, compared to the prior year’s quarter.

Sequentially though, the increase was not as substantial. Compared to the prior quarter (ending April 30, 2021), sales were up just 6.8%. Diluted earnings per share growth (from $0.74 cents to $1.04, or a 40.5% increase) may not have been anything to sneeze at.

Don’t expect this high level of earnings growth to carry on. The sell-side’s average estimate for ZM stock earnings in the current quarter is $1.09 per share. 

Looking further ahead, consensus calls for essentially zero earnings growth in the upcoming fiscal year (ending January 2023). Average estimates for earnings in FY23 come in at $4.85 per share, just a penny above the $4.84 projections for FY22.

Valuation

Admittedly, it could be shortsighted to write off ZM stock based on the analyst estimates mentioned above. Given that the company has consistently beat projections, it may continue to do so, even as its boom times have come and gone.

Then again, better-than-expected results in the quarters ahead may not save the day. Its current multiple of 57.6x could be sustainable if it was still able to grow earnings by 40%-50%, as it’s on track to do this fiscal year compared to last.

However, if earnings growth is falling to a still-solid but less exciting 10%-20% per year? That could mean a drop to a price that gives it a earnings multiple of 30x to 40x, on par with more mature tech companies like Microsoft (MSFT). In other words, a share price between $145.20 and $193.60 per share.

Worse yet, this potential fall in price is assuming that factors like the tapering of the U.S. Federal Reserve’s bond purchase program, and rising bond yields, don’t push overall markets lower.

What Analysts are Saying About ZM Stock

According to TipRanks, ZM stock has a analyst rating consensus of Moderate Buy. Out of 18 analyst ratings, 10 rate it a Buy, eight rate it a Hold, and none rate it a Sell.

The average ZM price target is $375.85 per share, implying around 33.9% upside from today’s prices. Analyst price targets range from a low of $304 per share, to a high of $460 per share.

Something Else

There may be something in the near-term that gives ZM a temporary boost: a termination of its proposed deal to acquire rival Five9 (FIVN) in a $14.7-billion all-stock transaction. 

News of this deal has also contributed to this stock heading lower. Why? Zoom was expected to see earnings dilution following the transaction close. Yet, with shareholder advisor Institutional Shareholder Services recommending that Five9 shareholders vote against the takeover, it may be soon off the table.

Even so, with a larger issue (earnings deceleration) still on the table, investors may find it best to wait for ZM stock to give up more of its pandemic-related gains.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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