Heading into second-quarter earnings, Zoom Video Communications (NASDAQ:ZM) has been charging ahead. In fact, year-to-date, ZM stock is up over 349%, currently hovering at $306. On Aug. 28, the shares hit an all-time high of $303.58.
The San Jose, California-based video conferencing company is announcing Q2 metrics on Aug. 31 after the closing bell. Today, we’ll take a closer look at what to expect from ZM stock following the release of results.
Remote Connectivity Provides Long-Term Tailwinds
Zoom was set up in 2011 by Eric Yuan, a former Cisco Systems (NASDAQ:CSCO) Webex engineer and executive. Through its software the company allows users to host video conferences with each other. It offers various basic and paid premium plans.
The company had its IPO in April 2019, at an opening price of $65. After a volatile several months in 2019, ZM stock started 2020 around $67. Then the novel coronavirus reached our shores and changed the way most of us live, work, and study.
Before long, “to zoom” became a verb, providing a long-term catalyst to ZM stock. Now the cloud-based video conferencing service is a household name, not only in the U.S., but worldwide. Millions take to Zoom to hold classes and business meetings online.
Recent research led by Patrick Lowenthal of Boise State University highlights: “The COVID-19 pandemic forced colleges and universities to move in person courses to some type of remote learning or online format … Not surprisingly, many faculty opted to hold classes using web conferencing tools like Zoom ..”
Given the increased number of Covid-19 cases globally, it’s hard to know how the world will look like in a few months. However, it would be fair to say that going forward, remote connectivity in professional and personal lives as well as in schools is likely to stay with us.
What Could Derail ZM Stock Short-Term?
The 52-week range of ZM shares has been $60.97-$303.58. Over the past year, the stock is up by over 234%.
Zoom is a momentum stock that is traded heavily, especially around earnings days. When the company released Q1 results in early June, its quarterly revenue of $328.2 million beat analysts’ expectations easily. Adjusted earnings came at 20 cents per share. The Street was expecting 9 cents.
Yet, following the results, ZM stock fell in after-hours trading and was volatile the next few days. Why? During the conference call, management said it expected high cloud computing costs to address the surge in demand. But over the past three months, the stock has surged ahead and is up about 30%.
It’s possible that a similar choppy move will be in store for ZM stock in the coming days. Given how far the stock has increased in the past several months, some short-term profit-taking is likely in the shares. Short-term traders may want to exercise caution.
Are you an investor who also pays attention to short-term technical charts? Then you may be interested to know ZM stock is currently overbought. Yet a momentum stock can stay overbought for quite some time.
Finally, earlier in the year, Zoom made headlines with a wide range of security issues. A practice called, “Zoombombing” happens when uninvited participants unexpectedly appear in conferences and send offensive material to attendees. There have also been allegations of poor information privacy and computer security practices.
While such concerns seem to be behind the company at this point, a similar problem in the coming months could easily put pressure on ZM stock.
Should You Buy the Stock Now?
Although the company has long-term tailwinds that will likely push the stock much higher in the new decade, September may bring choppiness and profit-taking. Any move toward the $275-level or below would offer a better entry point for long-term investors.
If you already own Zoom shares, you might want to stay the course and hold onto your position. That said, if you are worried about further profit-taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3% to 5% below the current price point to protect the profits you’ve already made from ZM stock.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon (Oct. 16 expiry). Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.
The Bottom Line
In 2020, millions have been flocking to the video-conferencing platform Zoom to virtually meet with classmates, colleagues, friends and family. As a result, ZM stock recently hit an all-time high price.
If you find the shares to be expensive at this point, but would nonetheless have exposure to the company, you may consider buying an exchange-traded fund (ETF) that has ZM stock as a holding. Examples would include the Global X Cloud Computing ETF (NASDAQ:CLOU), the Renaissance IPO ETF (NYSEARCA:IPO), and the Direxion Work From Home (NYSEARCA:WFH).
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.