Zoom Is Down 87%, Is It Time to Buy?

The rise of the work-from-home trend meant Zoom (NASDAQ: ZM) became synonymous with video communication, triggering ZM share price to soar a few years ago. The company went public in 2019 with shares trading at around $60. By the fall of 2020, ZM sold for over $550 per share.

But those highs didn’t last for long. The stock began to falter in 2021, and then took a nosedive after the company missed sales expectations in the later part of the year.

The decline continued through 2023, and Zoom now trades 87% below its highs and only 12% above the level at which it first began trading.

Some called the company a stop-gap during lockdowns but over the past four quarters, Zoom has proven that assumption wrong. It has soundly beaten expectations for revenues and earnings. Plus, it has a stranglehold on the industry with a 57% share of the video conferencing market.

Older generations may be surprised to learn that just under 40% of global workers do remote and hybrid work, a trend that increased from 2022 to 2023.

So with a large market share and the remote work trend showing no signs of disappearing, will Zoom stock bounce back to former highs?

Why Did Zoom Stock Fall?

Zoom blamed economic factors for its declining revenue in 2022 as clients cut costs. However, over the last four earnings seasons, the company has managed to steady the ship so to speak. Management reported higher revenues than expected by a margin of around 1.5%-2%.

Earnings per share have been a more dramatic beat, and Zoom has beaten earnings estimates by over 16% in each of the last 4 quarters. Still, those impressive financials haven’t moved the needle for investors, who have largely dismissed the company’s recent success. That may well suggest that investors consider Zoom’s former share price highs a flash in the pan success and lightning in a bottle won’t strike twice.

Further, concerns are mounting among analysts about the growing competitive landscape. Even though Zoom has a commanding share of the market, Microsoft and Google both offer competing video call solutions.

Both companies have deep pockets, extensive reach in the corporate sector and a significant head-start in AI. Even though Zoom has begun to leverage AI in its new offerings, it lacks the customer reach those tech giants enjoy.

Will Zoom Stock Recover

There are lots of reasons to be bullish on Zoom’s prospects as the company’s 3rd quarter of 2023 earnings release demonstrated. Total revenue of 1.14 billion was 3.2% higher than the same quarter the year prior and beat analysts’ expectations by 1.6%

But it was the company’s bottom line that stunned investors as net income of $141.2 million represented a 192% improvement over last year. That meant that diluted earnings per share were $0.45, 19.5% above third-quarter estimates. The company’s success in the quarter motivated Zoom’s management to increase its outlook for fiscal year 2024.

The company now has 217,900 enterprise clients, which is a 5% improvement over last year’s subscriber totals. The amount of those customers that spent over $100,000 on the platform over the last 12 months was up 13.5% to 3,731.

Even with all of the good news from the earnings call, ZM share price has not been moved meaningfully. After a brief increase in the tail end of 2023, the stock has fallen back to where it was trading at the time of the 3rd quarter release.

How High Will Zoom Stock Go?

The consensus among analysts is that Zoom stock will go higher to $79.26 per share. 

Of the 34 analysts who have provided ratings on ZM, 22 analysts assess it as a Hold while 10 consider it a Buy. Two of those analysts believe Zoom shares can break out over the next year with the highest price target forecasting that Zoom will roar back to $105 per share, a 53.7% gain from present levels.

Even the current consensus price target represents a solid 15.6% increase from where the stock currently trades. On the other hand, there are two sell ratings on Zoom, and the lowest forecast predicts the stock will fall by 12.2% to $60 per share over the next 12 months.

Is Zoom Stock Undervalued?

Even if the analysts aren’t ready to fully endorse Zoom, there are certainly indicators that the stock could be undervalued.

The current price-to-sales value of 4.6x makes the stock look attractive compared to software competitors. Many rivals have P/S ratios above 10x, and that includes Microsoft.

Zoom has also delivered consistent increases in revenues, profits, and subscribers over the past year and while few expect it to trade over $550 per share anytime soon, the stock has fallen so far that there is clearly room for an upside surprise.

Is Zoom Stock a Buy or Sell?

For prospective investors now, two primary issues are top of mind. First, a reversal in the trend towards remote work and video conferencing would stifle growth. On that note, shareholders can find solace knowing that the numbers don’t support a U-turn at this time. Just under half of global workers had some remote aspect to their jobs, a slight increase compared to the year prior.

The second concern is increased competition. Microsoft Teams holds the second largest market share in the video conferencing industry, at 25%. While that’s well below Zoom’s share, it is a very legitimate worry that it will leverage its ecosystem alongside Alphabet to erode Zoom’s dominance in the space.

So far, Zoom’s AI companion has been a success with customers, but Microsoft and Google, among others, can offer much more robust AI offerings. Despite those concerns, there are a lot of good reasons to invest in Zoom at this stage. The company’s strong underlying financial performance is the most compelling one of all, and that doesn’t seem likely to change anytime soon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.