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Zoom Stock Could Easily Be on Its Way to New Highs From Here

There was perhaps no other company so perfectly designed for the novel coronavirus pandemic. Zoom Video (NASDAQ:ZM) went public in April 2019 and was inching along as it came into 2020. However, ZM stock had begun to gain steam as China was struggling with Covid-19. 

A woman sitting at a desk waves at a large number of people on the videoconferencing software Zoom (ZM).
Source: Girts Ragelis /

Then the virus spread to Italy and other parts of Europe and Zoom kept gaining steam. Once the pandemic hit the U.S. and the other parts of the world, the stock exploded. 

After entering the year just below $70, ZM stock exploded to a high of ~$588 in October 2020. Roughly a year later and that momentum has reversed. At this month’s low, shares were down nearly 50% from this time last year. 

The first step to reclaiming the highs is being a great business. The company already has that going for it and did so before the pandemic began.

What Zoom Needs

Maybe investors forgot — or perhaps they never knew — but Zoom Video was a great business before Covid-19 came along. That’s why it was in the perfect position for the pandemic. 

The company delivered top- and bottom-line beats in its first four quarterly reports as a public company (before the pandemic hit). That came with multiple upside guidance outlooks too, while 2019 revenue grew 118% vs. the prior year. 

Not only that, but the company was also profitable and free cash flow positive. Zoom’s one problem was (and to an extent, still is) its valuation. To be completely transparent, that was my biggest problem with it too. 

At its all-time high, ZM stock commanded a market cap of more than $160 billion. For a company that’s forecast to generate $4 billion in sales this year, that’s an insane valuation. 

Now that the stock is down 50% the valuation is a bit more reasonable. ZM stock trades at about 20 times this year’s revenue forecasts. That’s still rich, but it’s down considerably. 

Analysts expect the company to generate 51% revenue growth this year. That’s despite the insanely explosive year of 2020 (fiscal 2021 for the company) where revenue grew 325% year over year. 

In 2022 (FY 2023), consensus expectations call for roughly 18% growth. The following year, estimates call for 17.5% sales growth.

To have such strong growth following such a robust period of sales growth would be remarkable. The growth rate will slow, but Zoom won’t stop growing.

There’s Still Downside Potential

If we’re asking what can go right, it’s only fair to ask what can go wrong. 

The biggest risk to ZM stock is its growth. If the company can continue to churn out solid revenue growth and grow its bottom line, the stock will likely reward shareholders at some point. 

Not that we invest in stocks to be rewarded “at some point,” but as long as Zoom continues to grow, the stock price should work itself out. If the company doesn’t continue to grow, then there’s a serious risk here. 

Say we don’t embrace the work-from-home theme as much as we think society will. Perhaps competition increases significantly from Salesforce (NYSE:CRM) after its acquisition of Slack or from Microsoft (NASDAQ:MSFT). Or both. Then Zoom could be in trouble. 

The Bottom Line on ZM Stock

Zoom Video was a great company before the pandemic and it will hopefully remain a great company after. This is incredibly important to remember. 

The stock saw an 850% rally from its December 2019 low to its October 2020 high. It only makes sense for shares to pull back and consolidate some of those massive gains. And it may very well take several quarters or years to digest the move. We’re already one year removed from the high. 

We had a five-wave “ABCDE” correction from the high. ZM stock reversed off a low at $273.20 and powered all the way back up to $400. However, this level became resistance and we’ve gone right back down. 

Could this still be a larger digestion or correction? Yes, it’s possible. For now though, ZM stock has reclaimed the $273.20 level. Bulls may be long against that level. 

Aggressive bulls may stay long against the October low, down near $250. Conservative bulls may prefer to be long only if the stock is above $273. Some investors may prefer to simply start accumulating the stock as it’s down so much from the highs and look for it pay off over time. 

In any case, over $273 opens the door to $300 and the 21-month moving average. Above these levels puts $350 and the declining 50-week moving average in play. Above that and $400 resistance is possible. 

On the downside, a break of $250 could put the $230 range in play. 

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

Article printed from InvestorPlace Media,

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