Why Is Zoom Stock Dropping?

It’s been a decidedly modest year for Zoom Communications (NASDAQ:ZM). Posting an 8.1% return for the year compared to twice that for the S&P 500 is nothing to write home about, especially for a stock that once captured the attention of institutional and retail investors alike a couple of years ago.

For those who have held on and those considering starting a position, the question lingers on why is Zoom stock dropping? The answers are manifold.

Why Is Zoom Struggling?

ZM share price has struggled on the back of so-so financials, especially top line figures. In the heady years of 2019-2022, Zoom reported sales growth numbers that were truly spectacular, the stuff investors can only dream about.

During those 4 years, sales grew by 118.2%, 88.4%, 325.8% and 54.6% respectively. Then the slowdown hit as the economy returned to some level of normalcy and 2023 was accompanied by revenue growth of “just” 7.1%.

Of course, such so-called “modest” growth was, in actual fact, impressive given the massive sales numbers that had been posted in prior years.

For context, total sales in 2019 for the full year were $333 million whereas sales growth from 2022 to 2023 was about the same amount. That’s because full year sales in 2022 were just shy of $4.1 billion. 

After more than 10x’ing growth in the span of less than five years, it’s no wonder that the pace of growth slowed. But Wall Street wasn’t in any mood to forgive the slowdown, and punished the stock accordingly from highs of $589 in 2020 to lows of around $60 this year, levels not seen since 2019.

So what does the future hold for Zoom?

Will Zoom Stock Ever Go Up Again?

The future is bright for Zoom, regardless of the abomination that has been the share price in the past few years.

For one, the fundamental story looks really good now. Specifically, when we examined the financials, the balance sheet looked pristine with $1 billion of cash and $4.3 billion in short-term investments accompanied by zero debt.

This is a really well-capitalized company that is printing money as evident from its gross margins that most recently were reported at 74.9%.

The company continues to post positive operating income figures. In all of the five past years, these figures have been in the black and by large amounts too. For example, the operating income in 2023 alone was $245 million.

So fundamentally, the future looks bright, and it’s confirmed by a discounted cash flow forecast analysis that implies 36.9% upside for ZM to $98 per share.

Of the 22 analysts covering the stock, overall sentiment is positive too with the consensus rating putting ZM at fair value of $81.80 per share.

On a technical basis, the stock looks good too having formed an almost year-long base. Generally, the longer the base, the more potential the stock has to power higher when it finally breaks out of it.

Is Zoom Still a Good Stock To Buy?

No doubt, poor EPS results have contributed to ZM stock dropping in recent years. In 2022, earnings per share were reported at $4.50 while a year later they plunged to $0.34. That’s the kind of decline that could cause investors to get heart palpitations and they seem to have reacted by selling the stock by the boatload.

For those willing to view the company through fundamental and technical lenses versus a share price lens, ZM offers a number of compelling reasons to jump or stay on board. Revenues are still growing off of a massive base, the cash pile has eclipsed $1 billion and short-term investments are over 4x that amount.

For sure, there have been bumps in the road but ZM appears to be a stock that will reward patient investor who stay the course.

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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.