Zoom Video Communications (NASDAQ:ZM) shares have had a rough week on the news front, and sellers have been quick to strike. This morning’s 2.5% gap lower at the open brings the peak-to-trough drawdown for Zoom stock to 23%.
Today’s drop was caused by the company admitting it doesn’t have 300 million daily active users.
Let’s take a closer look at what’s going on, and more importantly, how to trade it.
Tomayto, Tomahto
Zoom has ridden the stay-at-home wave and captured millions of new users. Investors seeking to capitalize on the global pandemic have had ZM stock on their radar since the beginning. Fortunately for fanboys, their affection has been reciprocated. At last week’s peak, the stock’s year-to-date gain stood at a whopping 167%, and we’re still in April.
This morning’s drama surrounded a correction the company made to a blog post that inflated the number of users. Originally, Zoom stated they had “more than 300 million daily active users,” and “300 million people around the world are using Zoom.” Later the company modified the post, removing both phrases and stating instead that they had “300 million daily Zoom meeting participants.”
To avoid getting lost in the weeds on the definition differences, let’s just jump to the takeaway. Because of the misleading verbiage used, the company overinflated the actual number of users.
Competition Heating Up for Zoom Stock
A slip of the tongue isn’t the only issue plaguing Zoom this week. Competition from rivals also has shareholders rethinking their investment. Last Friday, Facebook announced a video conferencing platform dubbed “Messenger Rooms.” The tool will allow 50 people to video conference at once and places the social media king in direct competition with Zoom.
The news ultimately drove ZM stock down some 12% on Friday, reversing earlier gains that had the stock courting record highs. If that wasn’t enough, headlines just hit yesterday that Alphabet (NASDAQ:GOOG, GOOGL) was entering the free video conferencing fray by making its video conferencing tool, Meet, available to the masses.
While the increased competition doesn’t spell death for Zoom, it is making investors rethink what a fair price to pay for a stock that has become relatively expensive this year is.
Zoom Stock Charts
If Zoom had entered the past week of bad news at a support zone, we’d be talking about a significant breakdown in its price chart. But it didn’t. It was basking in record highs and had plenty of room to retreat without threatening the integrity of its uptrend. The weekly time frame still looks overall healthy, but with last week’s rally getting cut short, we do have a bearish momentum signal in the RSI.
I’m not too concerned, given that its prior advance was historic and unlikely to be repeated. The best-case scenario is to see the stock consolidate for a spell to digest this year’s gains and build a base for future breakouts.
Turning to the daily chart reveals today’s selloff did break a short-term pivot low and the 20-day moving average. That makes this more than a garden-variety retracement, but not yet something that would make me bet against the longer-term uptrend. I still think we could see buyers emerge to defend the rising 50-day moving average or the next support zone near $110 if the pullback persists.
Pick Your Poison
Here are two trades for bulls and bears to consider.
If you think Zoom stock is unlikely to reach a new high in the next month, you could sell June call spreads.
Bear Trade: Sell the June $180/$185 bear call spread for 75 cents.
If you think this dip is ultimately a buying opportunity and that most of the damage is already baked in, then sell June put spreads. I would suggest at least waiting for signs that ZM is bottoming, though. If it drops for another day or two, you’ll get an even better entry point.
Bull Trade: Sell the June $100/$95 bull put spread for $1.
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