The market today looks and feels very different from how it was just six months ago. At last year’s end, Zoom (NASDAQ:ZM) was infrequently mentioned on social media or by analysts on television, but now ZM stock has their full attention.
Social distancing has made video chat and conferencing a necessity for many businesses and families. And with that, the average daily trading volume on Zoom stock has gone through the roof.
The Zoom stock price is trading at sky-high levels, as well. The share price was under $70 at the beginning of the year, but it powered its way up to the $175 region by the middle of March. But there’s a famous social-media name that could provide stiff competition, thereby causing problems for Zoom’s shareholders.
Fading Hype and ZM Stock
When we’re in the midst of a powerful stock-price move, it’s often hard to imagine that gravity will take over. And there is merit to the contention that higher prices lead to higher prices. That’s certainly the case with ZM stock.
The thing is, sooner or later, gravity always wins. Profit-taking is inevitable. The short sellers will show up at some point. Besides, social distancing won’t be top-of-mind forever.
But most importantly, extreme market sentiments can only prevail for so long. In sizing up the situation, Citi analyst Walter Pritchard combines clear-sighted judgment with a healthy dose of skepticism:
“[Zoom] has quickly become a household name and is likely seeing significant benefit from a need to replace in-person meetings during Covid-19. We see a lot priced into the stock already … We fear we may see a balance of re-open sentiment that could challenge some of the recent excitement around the stock, which trades at a meaningful premium.”
Pritchard assessment is a polite and artfully worded way of calling Zoom stock overpriced. But he’s going beyond that, as Pritchard also seems to be implying that the current share price, and perhaps the company itself, is materially dependent on the persistence of shelter-in-place mandates.
Move Over, Zoom
It is indeed problematic that, as Pritchard seems to suggest, an inevitable “re-open sentiment” will tank the Zoom stock price. That alone should deter value-focused investors from buying shares at the current price point.
But it gets even worse as Zoom’s got a fierce and massive rival in the form of Facebook‘s (NASDAQ:FB) Messenger Rooms. This is a video-chat service that’s capable of supporting 50 participants in a single video call.
Not only that, but Facebook is placing no time limits on video calls made through Messenger Rooms. Plus, soon users of Instagram and WhatsApp (which are owned by Facebook) will be able to initiate and/or join the Messenger Rooms video calls from within those apps.
This presents a major threat to Zoom’s dominance in the video-chat space. Facebook claims that, between its Messenger and WhatsApp users, the company has 700 million account holders who are already using voice and video calls.
That’s a gigantic user base, and the Messenger Rooms rollout is bound to diminish Zoom’s market share. Facebook’s brand recognition is powerful and the company is adept at getting users addicted to its platform.
One critical question, though is whether businesses will switch from Zoom to Facebook. It’s possible that Zoom will be viewed as the business-oriented video-chat service while Messenger Rooms is seen as the go-to for personal/social use. But as far as that goes, only time will tell.
The Takeaway on Zoom Stock
Enthusiastic traders have pushed Zoom stock to dizzying heights, but now they must face a hard question: will social-media behemoth Facebook bring upstart Zoom back down to earth?
It probably will, to some extent at least. And with Zoom stock having flown so high, the return trip could be swift and unpleasant.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
