Yes, consumers flocked to Zoom Video Communications (ZM) during the coronavirus emergency. Profits soared for ZM stock, which outperformed the S&P 500, but that big run is long over. Can Zoom stock thrive once again as the company refocuses on corporate clients?
Standing in the way is Microsoft (MSFT) and its Teams communications tools for large companies and small businesses.
“The video conferencing market is a two-headed race between Microsoft Teams and Zoom,” Morgan Stanley analyst Meta Marshall said in a recent note to clients.
Zoom recently rebranded its tools to Zoom Team Chat. It announced new integrations with Atlassian (TEAM) and ServiceNow (NOW).
One possible catalyst for ZM stock is the upcoming customer conference called Zoomtopia. It’s set for Nov. 8 to Nov. 9. Zoom Video could roll out new products and provide strategy updates, analysts say.
Investors should be cautious of any buys amid the bear market and Fed rate hikes.
Zoom Stock: 2023 Outlook Lowered
Thus far in 2022, ZM stock has retreated about 55% amid volatility in the tech-heavy Nasdaq composite. Zoom stock has underperformed the S&P 500, which is down 22%.
Software growth stocks continue to struggle. A closely watched software benchmark — the iShares Expanded Tech-Software ETF (IGV) is down 36% in 2022. The software index retreated over 11% in September.
On the plus side, Zoom Video had $5.5 billion in cash on its balance sheet as of July 31.
Zoom Video reported mixed July-quarter results while guidance missed Wall Street estimates amid weakness in consumer and small business sales. Updated fiscal 2023 revenue guidance now calls for 7% year-over-year growth, down from earlier guidance of 11% growth.
Zoom’s cloud-based software sets up video calls, with chat tools available. Also, customers can easily share content. But its growth in the consumer market will likely continue to slow amid rising competition.
ZM Stock: Strong Balance Sheet
Amid Covid-19, 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.
The free use of Zoom for K-12 schools stopped on June 30. Some schools could upgrade to paid versions, said a UBS report.
In addition, demand for Zoom videoconferencing software surged as businesses told employees to work from home. Revenue growth for Zoom stock has slowed as in-person meetings resume and workers return to offices.
As the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s success. 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.
Five9 Acquisition Terminated
In the business market, Zoom rivals include RingCentral (RNG), Cisco Systems (CSCO), Google and others. Zoom faces pricing pressure in the business market as competition intensifies, said a UBS report.
Zoom Video in June said that Greg Tomb will join the company as president. Tomb had been at Alphabet‘s (GOOGL) Google Cloud, where he was most recently vice president of sales for Google Workspace.
Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.
Zoom Video and Five9 (FIVN) in July 2021 announced a deal to merge. Started in 2001, Five9 automates call center services with website chatbots, or virtual assistants.
The all-stock deal was originally valued at $14.7 billion. But the companies terminated the agreement on Sept. 30.
Zoom Video aims to be a player in the contact center market with its own products and services. And, artificial intelligence software will likely play a role.
At Zoom’s “Work Transformation Summit,” it showcased IQ for Sales. The product provides conversation intelligence add-on tools for business meetings.
Zoom in May acquired Solvvy, which uses artificial intelligence-based conversational tools in online customer support. Zoom has also invested in Observe.AI, a startup that uses artificial intelligence for contact center apps.
ZM Stock: Customer Retention Key
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. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.
A “Zoom Meeting” refers to a videoconferencing session hosted on its cloud infrastructure. Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats.
It’s not clear how much some new product initiatives are contributing to growth.
Zoom Phone, a cloud-calling product rolled out in 2019, lets customers set up group internet phone calls without video. The Zoom Phone replaces traditional business PBX phone systems.
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 stock has created a $100 million fund for app developers.
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 later formed San Jose, Calif.-based Zoom Video in 2011.
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.
Zoom Video has forged new deals in the enterprise market, such as one with software maker ServiceNow (NOW).
In addition, Zoom Video in 2021 hired former Microsoft executive Ricky Kapur as the head of Asia Pacific marketing.
Zoom Stock Fundamental Analysis
In Q2, Zoom earnings fell 23% to an adjusted $1.05 per share from a year earlier but topped estimates amid lowered expectations.
Revenue rose 8% to $1.09 billion, slowing from 54% growth in the year-earlier quarter. A year earlier, Zoom earned $1.36 a share on sales of $1.02 billion.
Zoom stock analysts projected earnings of 94 cents a share on sales of $1.12 billion for the period ended July 31.
In addition, Zoom said it had 3,116 customers contributing more than $100,000 each annually, up 37% from a year earlier.
For the current quarter ending in September, Zoom Video forecast earnings per share in a range of 82 cents to 83 cents, compared with analyst estimates for 92 cents. Zoom Video said it expects revenue in a range of $1.095 billion to $1.1 billion vs. estimates of $1.15 billion.
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.
But by late June that year, 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 IPO-launch 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.
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.
ZM stock currently owns an IBD Relative Strength Rating of only 15 out of a best-possible 99. The Relative Strength rating shows how a stock’s price performance stacks up against all other stocks over the last 52 weeks.
Zoom Stock: Is It A Buy Right Now?
Zoom stock holds an IBD Composite Rating of 38 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.
As of Oct. 22, ZM stock has no valid entry point. To be actionable, Zoom stock needs to form a new base.
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.
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