Look to Buy Zoom Stock on a Pullback

Has the rally of Zoom (NASDAQ:ZM) stock been exhausted?

zoom (ZM) logo on a building
Source: Michael Vi / Shutterstock.com

That’s a fair question to ask after the video teleconference company’s share price has more than tripled so far this year. While demand for the company’s video-conferencing services skyrocketed as offices shut down amidst the Covid-19 pandemic and virtual meetings from home became the norm, at this point the firm’s  current and future growth has likely been baked into Zoom’s stock price.

After moving steadily upwards since early April, ZM stock has been volatile in August.

Part of the reason for the uneven performance of Zoom’s stock this month has been the service’s repeated service outages. Each time the company reports a technical glitch, ZM stock swoons.

To be sure, the company works quickly to resolve any issues that arise. However, disruptions to its service have occurred enough recently that its management has had to respond with a public-relations offensive.

Zoom CEO Eric Yuan recently took to Twitter to apologize for the disruptions, stating that “…we know the responsibility we have to keep your meetings, classrooms & important events running.”

Part of the reason for the outages has been the company’s explosive growth since the pandemic began. Research firm Bernstein estimated that Zoom’s mobile app had 173 million monthly active users as of May 27, up from 14 million on March 4. Keeping up with that kind of demand poses challenges.

The other big issue facing Zoom is competition. From Microsoft’s (NASDAQ:MSFT) MS Teams and Skype to Cisco System’s (NASDAQ:CSCO) Webex and GoToMeeting, there is a growing number of companies that are expanding their videoconferencing offerings or introducing new options to businesses and consumers.

The video-conferencing market generated sales of $14 billion in 2019 and is forecast to grow at a compound annual growth rate (CAGR) of 19% between 2020 and 2026, according to Global Market Insights. Driving its growth will be the continued move towards permanent remote-work arrangements, as well as the integration of new innovations such as three dimensional (3D) and virtual-reality technologies.

Currently, Zoom is the leading web conferencing platform in the U.S. with a 42.8% market share. However, the company will have to remain vigilant and keep its focus on innovation and customer service to stay ahead of the rapidly expanding pack of competitors.

The Bullish Case

Despite some headwinds, there is still a bullish case to be made for ZM stock. Earlier in August, Zoom announced that its video-conferencing software will soon be available on popular smart displays from Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet’s (NASDAQ:GOOGL) Google. Zoom hopes that more people will use its video capabilities if they are part of products people are already utilizing or have in their homes.

As one would expect, Zoom’s results this year have been stellar. The company’s revenue in its fiscal first quarter that ended on April 30 jumped 169% to $328.2 million.

Equally impressive has been the forward guidance provided by Zoom. The company expects its full-year revenue to climb 187% to $1.80 billion. Zoom  predicts that its profits will expand heading into 2021. And not all of Zoom’s momentum has come from the pandemic. In 2019, before Covid-19, the company reported that its sales had jumped 88%.

Additionally, Zoom is one of the most affordable video-conferencing platforms available today. Its basic video-calling package is free, and its business plans cost $15 or $20 per employee. Plus, Zoom get high grades from its customers. The company has a net promoter score, on a 100 point scale, of 70, indicating that customers are overwhelmingly satisfied with its product. And bulls argue that remote work and video conferencing are here for good.

The Verdict on ZM Stock

While there is a lot to like about ZM stock and the company is likely to benefit from the work-from-home trend going forward, the reality is that its share price has surged extremely far, extremely fast. Expecting Zoom to continue rallying to the same extent going forward is not realistic.

Analysts currently have a “hold” rating on ZM stock with a median price target of $235 per share, versus the stock’s current price of about $295. Investors should put Zoom stock on their watch lists for now and look to buy the shares on weakness in the coming months. Buying the stock at its current peak is not advisable.

As of this writing, Joel Baglole owned shares of MSFT and FB.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/look-to-buy-zoom-stock-on-a-pullback/.

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