Week after week and month after month, the bulls have seemingly been right about video-conferencing platform Zoom Video Communications (NASDAQ:ZM). It’s undoubtedly been a frustrating year for anyone who’s been bearish on ZM stock.
In a normal year, the force of gravity would take over at some point with just about any stock. However, 2020 is far from a normal year. The so-called “new normal” includes the novel coronavirus, lockdowns, quarantines and an overall avoidance of face-to-face contact.
Thus, while some sectors (cruise lines, airlines and malls immediately come to mind) have struggled this year, Zoom has flourished and so have the company’s stakeholders.
As the possibility of a second Covid-19 wave looms, the bull case for ZM stock is as evident as ever. On a technical level, though, value-oriented investors might view Zoom as overbought. Who’s right, and is there a happy middle ground for cautious traders?
A Closer Look at ZM Stock
Just to give you a taste of how gravity-defying ZM stock is, we’ll take a snapshot of the stock market at the close of the trading day on Oct. 19.
For this particular session, ZM stock closed at $568.34, having gained 1.67% for the day. Can we attribute this to a “rising tide lifts all boats” phenomenon in tech stocks? Not really, since the Nasdaq lost 1.65% on that day.
Indeed, the U.S. stock-market indexes were generally down quite a bit. Undeterred, ZM stock marched upwards yet again on heavy trading volume. Message-board gurus cheered and mocked the bears as the stock notched another all-time high.
So here we are, with ZM stock sporting a trailing 12-month price-earnings ratio of 666. Clearly, this isn’t your father’s or your grandfather’s stock, unless they were buying Pets.com stock back in the early 2000s.
Zoom won’t likely go the way of Pets.com, but if valuations matter at all anymore, then investors should definitely be cautious with ZM stock.
An Easy Street Beat
One of the quickest but most significant maxims in the world of investing is, “Price matters.” And so, my cautionary argument against buying ZM stock right now is that the price is too high and may be due for a pullback.
That being said, I’m not recommending avoiding Zoom altogether. I’m only saying that it’s advisable to be patient and wait for the price to dip before taking a long position.
While Wall Street expected quarterly adjusted earnings per share of 45 cents, the actual result was 92 cents. And by the way, this figure marked a 1,050% improvement compared to the 8 cents posted during the previous quarter.
Moreover, Zoom’s quarterly revenues of $663.52 million easily outstripped analysts’ average estimate of $500.45 million. There are other impressive data points for that quarter, but you’ll have to read White’s article for that information.
Considering the Competition
Another InvestorPlace contributor extraordinaire who’s advising investors to be cautious on ZM stock is Luke Lango. Like me, Lango warns that this stock is dangerous on both the long and short sides.
Among Lango’s concerns is Zoom’s competition, which is considerable. Zoom might have been fairly early in the virtual-conferencing space, but nowadays there are some serious players in this market, including RingCentral (NYSE:RNG) and Microsoft (NASDAQ:MSFT) Teams.
In typically eloquent fashion, Lango gives the eternal bulls and price chasers a few stats to chew on:
“There are only 3 million businesses with 10 or more employees in Zoom’s core addressable markets of America, Canada, Europe and Oceania. It’s very likely that, by 2030, nearly all 3 million of them have some form of video conferencing software. But Zoom won’t have 3 million customers.”
Lango’s point is well-taken. To that, I’ll add that the video-conferencing market will mostly likely be saturated long before 2030. In fact, I’d claim that most businesses and tech-active individuals already have a preferred video-conferencing platform.
Between the fierce competition and the inherently limited market size, it’s becoming more and more difficult to justify Zoom’s astronomical price-earnings ratio.
The Bottom Line
In this “new normal,” it’s entirely possible for ZM stock to keep on zooming higher. Still, with its valuation getting stretched, it’s probably best to wait for a dip before dipping in.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.