Yes, shares in Zoom Video Communications (ZM) soared during the coronavirus emergency. But what’s the outlook for Zoom stock as the U.S. economy normalizes?
Amid volatility in the Nasdaq composite, ZM stock has retreated 7% in 2022.
Zoom’s cloud-based software sets up video calls, with chat tools available. Also, customers can easily share content.
Amid Covid-19, demand for Zoom videoconferencing software 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. Remote learning and needs in telemedicine also boosted demand for Zoom Video’s cloud-based services.
Zoom stock tumbled after it reported October quarter earnings and gave disappointing fourth-quarter guidance.
A closely watched software benchmark — the iShares Expanded Tech-Software ETF (IGV) — fell 4.2% in December after pulling back 5.5% in November.
For all of 2021, the IGV software index gained 12.3% vs. the S&P 500’s nearly 27% advance. In 2020, the software index soared nearly 52% vs. the S&P 500’s gain of 16.3%.
ZM Stock: Microsoft Teams Essentials A Threat?
ZM stock bulls argue that video calling is here to stay and will play a much larger role in businesses, schools and everyday lives. Problem, Zoom rivals also think it’s a big market opportunity and they don’t want Zoom to dominate.
Microsoft (MSFT) looms as a big threat with its Teams collaboration tools. Microsoft recently rolled out a low-priced, standalone product called Teams Essentials. It targets small businesses.
As the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s success. Another will be its ability to convert free users into paying subscribers. For customers with one to 10 employees, 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.
Zoom Stock: Five9 Deal Terminated
Zoom stock and Five9 (FIVN) on Sept. 30 terminated their merger agreement. The merger did not receive the votes needed for approval at a Five9 shareholder meeting.
Zoom Video and Five9 had announced the merger on July 19. Zoom Video agreed to buy Five9 in an all-stock deal originally valued at $14.7 billion.
But Zoom stock fell sharply after the announcement. Started in 2001, Five9 automates call center services with website chatbots, or virtual assistants.
Zoom and Five9 said they will maintain their existing partnership. Zoom intends to focus on its own Video Engagement Center (VEC) to participate in the contact center market via its own solution, said FBN Securities analyst Shebly Seyrafi, in a research note.
VEC was announced recently at Zoomtopia 2021 and is Zoom’s cloud-based contact center solution. It will launch in early 2022.
ZM Stock: Customer Retention Key
In addition, competition with RingCentral (RNG) has intensified. Zoom had partnered with RingCentral in the business market.
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.
Zoom stock has created a $100 million fund for app developers.
In addition, Zoom Video on June 29 hired former Microsoft executive Ricky Kapur as the head of Asia Pacific marketing. The same day, it acquired German startup Karlsruhe Information Technology Solutions. The startup provides real-time language translation tools that use artificial intelligence.
According to Morgan Stanley, Zoom garners about 50% of revenue from monthly payers. Zoom aims to convert monthly business subscribers to annual contracts.
In the business market, Zoom rivals include RingCentral, Cisco Systems (CSCO), Microsoft, LogMeIn and Fuze. Alphabet‘s (GOOGL) Google, Facebook (FB) and Verizon Communications (VZ) have pushed into the market.
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 in October, in a move to set itself apart from rivals.
Zoom Stock: The Ma Bell Of Video Calls?
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 on 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 2020, Zoom management introduced “OnZoom.” It’s an online event platform with paid admission. In late 2021, Zoom acquired assets —event production tools — from startup Liminal.
Zoom Phone A Potential Market Disruptor?
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 in 2019, lets customers set up group internet phone calls without video. In addition, Zoom Phone competes with products from Cisco, Avaya and RingCentral. The Zoom Phone replaces traditional business PBX phone systems.
When Zoom reported first-quarter earnings, it disclosed that Zoom Phone had 1.5 million users as of April 30, up 500,000 from the end of 2020.
Zoom cross-sells the Zoom Phone tools to business customers that already use its Meetings software. Bank of America analyst Daniel Bartus, in a bullish May 27 report, estimated that Zoom Phone could reach $2 billion in revenue by 2026.
In a move that should improve profit margins, Zoom recently renegotiated contracts with cloud computing services providers.
Zoom 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. He formed San Jose, Calif.-based Zoom Video in 2011.
Yuan recently transferred roughly 40% of his ownership stake in Zoom Video, 18 million shares worth an estimated $6 billion, as gifts to an unknown entity.
Zoom Video has built up alliances. Sales partners include Slack Technologies (TEAM), Salesforce.com (CRM), Atlassian (TEAM) and Box (BOX). Salesforce.com invested in Zoom stock prior to its initial public offering 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).
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.
Zoom Stock Fundamental Analysis
Zoom’s October quarter earnings rose 12% to $1.11 a share on an adjusted basis from a year earlier. Revenue jumped 35% to $1.051 billion.
Analysts projected earnings of $1.09 a share on sales of $1.02 billion for the period ended Oct. 31. Billings came in at $1.07 billion, up 20% from the year-earlier period. In Zoom’s second quarter, billings rose 28%.
The company said it had 2,507 customers contributing more than $100,000 each annually, up from 2,278 as of July 31.
For the current quarter ending in January, Zoom Video forecast revenue of $1.052 billion vs. estimates of $1.018 billion. Projected revenue growth came in flat versus the October quarter.
Zoom Video added 7,200 customers with 10-plus employees in the third quarter. It had with 512,100 such customers as of Oct. 31.
Revenue from customers with 10-plus employees climbed nearly 44% from a year earlier. They accounted for 66% of total revenue, up from 62% a year earlier.
ZM Stock Historical Performance
The Zoom IPO 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 2020, before the coronavirus outbreak.
Zoom stock broke out on Feb. 18 that year 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 2020, meanwhile, received favorable reviews from analysts. Shares hit an all-time intraday high of 588.84 on Oct. 19.
However, ZM stock in late October 2020 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.
ZM stock peaked at 588.84 on Oct. 19 2020. Zoom stock ended 2020 up more than 400%.
But Zoom stock retreated 45% in 2021 after booming the year before.
Zoom Stock: Is It A Buy Right Now?
ZM stock owns an IBD Relative Strength Rating of only 8 out of a best-possible 99.
Zoom stock holds an IBD Composite Rating of 54 out of a best possible 99.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
In addition, Zoom stock holds an Accumulation/Distribution Rating of D-minus. 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.
To be actionable, Zoom stock needs to form a new base. For technical reasons, ZM stock as of Jan. 13 is not a buy.
Check out IBD Stock Lists and other IBD content to find dozens more of the best stocks to buy or watch.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
YOU MAY ALSO LIKE:
How This IBD Tool Simplifies The Search For Top Stocks
Find Compelling Growth Stocks With IBD’s Stock Of The Day
Get A Free Trial Of IBD Leaderboard
Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists