Is Zoom Stock A Buy Right Now? Small Business Customer Turnover Key As Economy Reopens
Yes, shares in Zoom Video Communications (ZM) soared during the coronavirus emergency. But post-pandemic, what’s the outlook for Zoom stock?
Zoom stock popped after the company reported fourth-quarter earnings and revenue for the January quarter and its full-year, fiscal 2022 guidance also came in above expectations. Even so, the size of its quarterly revenue beat continued to moderate.
The January quarter “represented 8% revenue upside vs. consensus, compared to Q3 2021 at 12%, Q2 at 33%, and Q1 at 62%,” KeyBanc Capital Markets analyst Alex Kurtz said in a report to clients.
Zoom stock has been volatile as investors weigh a surge in second-wave coronavirus cases versus positive vaccine news.
For customers with one to 10 employees, monthly renewals are expected to slow as the economy reopens and shelter-in-place orders lift. There’s expected to be less turnover of larger customers.
While paid consumer subscribers are important, the company’s roots are in the enterprise market. Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.
ZM Stock: Acquisition In The Works?
Deutsche Bank analyst Matthew Niknam recently initiated coverage with a hold rating.
“We enter fiscal 2022 with incremental concern around churn risk in the back half of the year,” he said in the report. “This is mainly tied to Zoom’s small business customer set, which has grown significantly during the Covid pandemic, but is at greater risk of churn once the economy fully re-opens. For context, this customer set accounts for 37% of Zoom’s total revenue today.”
The company may be prepping for an acquisition. It raised $2 billion in a secondary offering on Jan. 15. Zoom stock already had $1.9 billion in cash on its balance sheet as of Oct. 31.
When the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s continued success. Another will be its ability to convert free users into paying subscribers.
According to Morgan Stanley, Zoom garners about 50% of revenue from monthly payers. Zoom aims to convert monthly business subscribers to annual contracts. In the January quarter, Zoom added a record 355 customers that will bring in over $100,000 in revenue annually.
Zoom Stock: Customer Retention Key
Amid Covid-19, demand for Zoom videoconferencing software has surged as businesses told employees to work from home. Zoom morphed into a social phenomenon as making video calls became routine for consumers to keep in touch with family and friends. Distance learning as schools re-opened and telemedicine also boosted demand for Zoom Video’s cloud-based services.
ZM stock bulls argue that video calling is here to stay and will play a much larger role in businesses, schools and everyday lives. Trouble is, Zoom rivals also think it’s a big market opportunity, and they don’t want Zoom to dominate.
In the business market, pre-coronavirus rivals included Cisco Systems (CSCO), Microsoft (MSFT), LogMeIn and Fuze. Alphabet‘s (GOOGL) Google, Facebook (FB) and Verizon Communications (VZ) have pushed into the market, aiming to derail Zoom’s torrid growth. Microsoft Teams collaboration tools has launched free trials targeting Zoom users.
On the consumer side, Zoom also faces stiff competition.
Zoom rolled out end-to-end encryption to address privacy concerns for free and paid users on Oct. 26, in a move to set itself apart from rivals.
ZM Stock: The Ma Bell Of Video Calls?
Zoom’s cloud-based software sets up video calls, with chat tools also available. Also, customers can easily share content.
A “Zoom Meeting” refers to a videoconferencing session hosted on its cloud infrastructure. During the Covid-19 crisis, Zoom upped investments on computer servers as demand surged.
One key to Zoom’s success has been a “freemium” business model. Zoom’s basic video-calling package is free.
Zoom puts limits of the number of participants in a group call and the length of meetings. Often company management learns about Zoom’s software after an employee reports a positive experience. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.
Many companies like Zoom tools because they usually don’t require support from tech staff.
At the Zoomtopia user conference in mid-October, Zoom management didn’t update financial goals except for raising long-term operating margin targets to 25% from 20%. Also, the company introduced “OnZoom.” It’s an online event platform with paid admission.
Cost Of Zoom Video Business Plans
Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats. Early on in the coronavirus crisis, Zoom offered online coupon codes with discounts.
Zoom Phone, a cloud-calling product rolled out last year, lets customers set up group internet phone calls without video. In addition, Zoom Phone competes with products from Cisco, Avaya and RingCentral (RNG).
Zoom cross-sells the Zoom Phone tools to business customers that already use its Meetings software. At Zoomtopia, management said there are 5,800 paid customers with more than 10 employees using Zoom Phone.
Chief Came To U.S. In 1997
Eric Yuan, Zoom’s chief executive and founder, came to the U.S. in 1997. He started out with WebEx Communications and eventually became its vice president of engineering.
Cisco acquired WebEx for $3.2 billion in 2007. Yuan then became Cisco’s corporate vice president of engineering for collaboration software. He formed San Jose, Calif.-based Zoom Video in 2011.
Yuan recently transferred roughly 40% of his ownership stake in Zoom Video, 18 million shares worth an estimated $6 billion, as gifts to an unknown entity.
Zoom, and its stock, face stiff competition from Cisco, Microsoft, Google and others. But Zoom Video has built up alliances.
Salesforce.com invested in Zoom stock prior to its IPO and reaped big gains. However, Salesforce recently sold off all of its shares in Zoom Video.
However, Zoom Video is forging new deals in the enterprise market, such as one with software maker ServiceNow (NOW).
Revenue growth decelerated in Zoom Video’s first four quarters as a public company, then skyrocketed in the April 2020 quarter amid the coronavirus crisis.
Zoom’s January-quarter earnings jumped 713% to $1.22 per share on an adjusted basis from a year earlier. Revenue soared 369% to $882.5 million, the company said.
Zoom Stock Fundamental Analysis
Analysts projected Zoom earnings of 79 cents a share on sales of $811.8 million.
The company said it had 467,100 business customers, each with more than 10 employees, as of Jan. 31. That’s up from 433,700 in the October quarter.
For the current quarter ending in April, Zoom forecast revenue of $902.5 million vs. analyst estimates of $830 million. Zoom said it expects adjusted profit of 96 cents at the midpoint of its guidance vs. estimates of 72 cents.
Zoom forecast fiscal 2022 revenue of $3.77 billion. Analysts had estimated revenue growth of 36.5% to $3.53 billion. Zoom Video said it expects adjusted earnings of $3.62 a share at the midpoint of its guidance versus analyst estimates of $2.96.
ZM Stock Historical Performance
The Zoom initial public offering in April 2019 raised $752 million, with shares priced at 36. ZM stock popped 72% on the first day of trading.
Zoom stock popped again on June 6, 2019, after the company’s earnings and guidance topped expectations. It hit an intraday high of 107.34 on June 20, up 198% from its IPO price. But, by late June, ZM stock consolidated as some analysts questioned Zoom’s lofty valuation.
Zoom stock formed a cup chart pattern over nearly eight months, hitting a low of 60.97 on Oct. 23 2019, down 43% from its all-time high.
ZM stock’s relative strength line began to improve in January, before the coronavirus outbreak.
Zoom stock broke out on Feb. 18 from a cup-with-handle buy point of 93.40 as the coronavirus pandemic began to spread globally. ZM stock soared in March as the corporate shift to work-from-home boosted demand for its video-calling app.
Shares retreated in early April amid reports that hackers were breaking into Zoom meetings. The company added new security features to thwart the cyberattacks.
ZM stock weathered the bad publicity over “Zoom bombing” on video chats. The stock popped in late April when it disclosed that daily active participants had reached 300 million — counting some participants multiple times per day.
By May, Zoom Video became a cultural phenomenon.
ZM Stock Technical Analysis
On a weekly chart, Zoom bounced off its 10-week moving average in early August. The 10-week moving average often provides a new entry after a big run-up and stocks take a breather.
The Zoomtopia user conference in October, meanwhile, received favorable reviews from analysts. Shares hit an all-time intraday high of 588.84 on Oct. 19.
However, ZM stock in late October sent sell signals. For one, it retreated more than 8% from the high-tight-flag buy point of 529.84.
In addition, Zoom stock dropped out of the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.
Zoom stock ended 2020 up more than 400%. On March 8, shares hit an intraday low of 309, down some 47% from the Oct. 19 high of 588.84. Not many stocks claw back from a correction that deep.
Zoom Stock: Is It A Buy Right Now?
ZM stock owns an IBD Relative Strength Rating of only 56 out of a possible 99.
In addition, Zoom stock holds an Accumulation/Distribution Rating of D. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
Meanwhile, Zoom stock has not formed a new base. ZM stock lacks a proper entry point. For technical reasons, ZM stock is not a buy.
Zoom Video is only one of many software growth stocks to monitor as “digital transformation” projects gain traction. In addition, there are many large-cap technology stocks growing at a fast rate.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
YOU MAY ALSO LIKE: