Will Zoom Stock Recover?

Will Zoom Stock Recover? Video communications company Zoom (NASDAQ:ZM) was one of the biggest success stories of the pandemic years.

 

Practically overnight, Zoom became a household name as the company’s signature video-calling platform gained widespread use for both professional and personal communication.

 

Since its glory days of 2020-21, the company’s stock has cratered, leading investors to wonder whether a recovery is in Zoom’s future.

 

Shares of Zoom soared during the COVID-19 pandemic, leading to the company becoming massively overvalued.

 

At one point, Zoom’s price-to-earnings ratio ballooned to over 800. The startup also briefly held a valuation greater than that of oil giant Exxon.

 

As economies around the world reopened, though, a correction was all but inevitable. It quickly became clear that working from home would not become the dominant form of work, and the use of Zoom for personal calls fell dramatically. In light of these realities, the stock fell markedly and delivered massive losses to investors who had bought near the peak.

 

Zoom has also suffered from a strengthening US dollar. A stronger dollar is a negative for exporters, as well as for companies based in foreign economies. As it markets its services to companies all over the world, Zoom is actively disadvantaged by a stronger dollar.

 

In Q2, Zoom reported $1.1 billion in revenues. In spite of the stock’s losses over the past year, revenue was up by 8 percent year-over-year.

 

Enterprise customer totals rose 18 percent, and the number of customers contributing $100,000 or more in revenue rose 37 percent.

 

The net dollar expansion rate for enterprise customers also rose to 120 percent, suggesting that Zoom is both attracting new customers and increasing the value of its existing client base.

 

Earnings, however, were far less positive. Analysts had expected earnings of $0.45 per share. Zoom reported just $0.28 per share, missing the target by a substantial margin. Earnings also contracted significantly from Q2 2021, in which Zoom reported $1.36 per share.

 

As such, Zoom is a mixed bag from a growth perspective. Revenue is rising, albeit at a modest pace. Enterprise customer counts and high-value customer counts, however, are increasing at a much faster pace.

 

Meanwhile, earnings are both contracting and missing relatively pessimistic analyst targets. Overall, it seems likely that Zoom still has growth left ahead of it, but that growth will probably be slow and steady.

 

In Q3, management expects very similar revenues to those reported in Q2. Full-year earnings guidance suggests that Zoom will earn an adjusted $0.82-0.82 per share. Revenue for the fiscal year is expected to reach about $4.39 billion.

 

Analysts broadly agree that Zoom will rise in the coming 12 months. The target price for ZM is $95, up 24.4 percent from the most recent price of $76.34. While there are forecasts that project the stock to lose more ground, even the most negative of these only suggests that Zoom would drop to $70.

 

In addition to these more reasonable figures, there are still some extreme Zoom bulls that believe the stock could mount a full recovery.

 

Cathie Wood’s ARK fund, for instance, forecasts a price of $1,500 per share by 2026. Such projections, however, seem to be predicated on the continuation of pandemic-era growth rates. As such, investors are better off using more conservative estimates to evaluate Zoom.

 

Zoom also appears to be more or less fairly valued. At 21 times forward earnings, Zoom isn’t overpriced for a company with its growth potential. Zoom also carries no appreciable debt, a fact that also helps to bolster its value argument. The stock most likely isn’t significantly undervalued, but it’s far from unreasonable at today’s prices.

 

One negative for Zoom’s value proposition is a significant decline in its cash flows. In Q2 2021, Zoom’s cash flow was $468 million. This year, that number fell to $257.2 million. This fall is understandable in light of rising costs, but it is still important for investors to keep in mind when analyzing Zoom.

 

Despite its challenges, Zoom still has some positives behind it. After rising to insane heights, the stock has now sold off to a reasonable range that fairly values its future growth. The company is also still posting modest revenue growth, suggesting that its popularity with enterprise customers could keep it going despite the decline in work-from-home arrangements.

 

Thanks to the pandemic, Zoom also enjoys at least a slight moat. The company became a go-to solution for those stuck at home, allowing its use to become embedded in many organizations. While this moat isn’t unassailable, there is a good chance that Zoom could remain the dominant video communication platform for some time to come.

 

It’s worth keeping in mind, though, that Zoom could stagnate or even continue to fall. Despite revenue growth, earnings and cash flow are still contracting. Further earnings misses could drive the stock lower, especially if revenue and customer growth slow.

 

Zoom is also very susceptible to macroeconomic conditions. Continued US dollar strength or an economic downturn could slow the company’s revenue growth and put further pressure on earnings. Given that the US could be due for a recession, Zoom may find itself facing large economic challenges that depress its business.

 

Ultimately, it appears that Zoom could mount a recovery, but it seems unlikely that it will regain its 2021 highs. For reference, even the most optimistic analyst price forecast puts Zoom at $130 within the next 12 months.

 

The ZM 52-week high, by contrast, was $291. Investors expecting a return to Zoom’s peak pricing will likely have an extremely long wait.

 

As such, Zoom has potential as a buy for growth investors who don’t mind a medium risk level. Investors who already own the stock may also do well to hold, as the upside over the coming year could be significant. A Zoom recovery isn’t a guarantee, but the stock looks as though it could perform well at today’s prices.

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