With an 8% rise since the beginning of October, Zoom Video Communications (NASDAQ:ZM) stock looks like it has finally bottomed.
It’s been a challenging year for the company behind Zoom video conference calls. As the world adopted work from home policies during the Covid-19 crisis and people moved to video conference en masse, Zoom Video Communications literally became the stock of the pandemic. As a result, the company’s share price catapulted 422% higher, peaking at $559 a share last October.
But its’s been all downhill for ZM stock since vaccines against Covid-19 started to be approved late last year. So far in 2021, ZM stock is down 15% at $286 per share. The share price is nearly 50% below its all-time high reached before Halloween last year.
While no doubt disappointing to shareholders, Zoom stock looks to have finally reached rock bottom and now appears to be on a much anticipated upswing.
Buying The Dip
While some on Wall Street continue to question the growth potential of Zoom as we return to classrooms, offices and gather in person, the view that ZM stock might finally be turning a corner was reinforced by the recent news that Ark Invest Chief Executive Officer Cathie Wood has been buying shares of the San Jose, California-based company.
In early September, Wood bought $56.5 million worth of Zoom stock, spread across its flagship ARK Innovation ETF (NYSEARCA:ARKK) and ARK Next Generation Internet ETF (NYSEARCA:ARKW). The purchase was a much needed vote of confidence in Zoom stock.
Part of the problem with Zoom Video Communications is that the company is struggling to top the explosive growth it experienced during the pandemic. While its growth has slowed, the company is still growing, and at rates that would make most companies share price explode upwards.
At the end of August, Zoom reported fiscal second quarter earnings that showed its revenue increased by 54% year-over-year, which, by most metrics, is phenomenal. However, Wall Street compared the latest quarter to the previous one where Zoom’s revenue grew 191%, and the stock immediately fell 12%. The fact that Zoom guided for 31% growth in the current quarter didn’t help matters.
Zoom’s earnings per share in its fiscal second quarter trounced analysts consensus expectations by a healthy 15%, coming in at $1.36 compared to $1.16 per share that had been forecast.
Another stumble that has hurt Zoom Video, or at least the perception surrounding the company, was its failed takeover bid for cloud contact-center software provider Five9 (NASDAQ:FIVN). Zoom had offered to buy Five9 for $14.7 billion in stock and said the acquisition would help it to move beyond video conferencing and serve as a long-term growth driver. However, the deal was quickly scuttled by regulator concerns over competition and Five9 shareholders who voted down the proposed acquisition.
A branch of the U.S. Department of Justice was reviewing the deal out of concern about potential foreign participation. But that review became mute after Five9 shareholders rejected the deal, balking at the 13% premium Zoom was offering on FIVN shares.
The loss of the Five9 takeover was yet another blow to Zoom at a time when the company has been struggling. However analysts seem confident that Zoom’s core video conference offering remains intact and the company remains a market leader despite growing competition.
Buy ZM Stock As It Begins To Rally
Zoom Video Communications is a tricky stock. Much of the decline in the company’s share price this year has been due to slowing growth and the fact that it has been unable to top the astronomical growth levels recorded during the pandemic. While it is true that Zoom’s growth has slowed, the company’s revenue is continuing to grow and its earnings are still beating Wall Street estimates.
Zoom is also profitable with $455 million of cash on hand. And while the Five9 acquisition didn’t work out, its a safe bet that Zoom is on the hunt for another target that will help to diversify its business. With the share price down 50% from all-time highs and starting to rise from the ashes, now looks like an opportune time for investors to take a position.
ZM stock is a buy.
On the date of publication, Joel Baglole 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 InvestorPlace.com Publishing Guidelines.