It wasn’t so long ago that Zoom Video Communications (NASDAQ:ZM) was being called the darling of all pandemic stocks, having been perfectly positioned to ride the work-from-home wave that broke in 2020. But like Icarus, Zoom appears to have flown too close to the sun, and their shares look like they’re within touching distance of giving back all of their pandemic-driven gains.
This might not come as a surprise to everyone. Before the world had even heard the word COVID, Zoom had already been struggling to capture investors’ attention. Their post-IPO rally through the summer of 2019 was quickly fizzling out when they found themselves in the right place at the right time, and before they knew what was happening, their shares had rallied almost 900% in less than a year. But since the vaccines started to be rolled out, they’ve found themselves suffering from a post-pandemic hangover, with their shares currently 80% off their all-time highs and already back at February 2020 levels. The two big questions on investors’ lips right now are can they remain relevant, and can they find a way to succeed in a post-pandemic world?
Decent Earnings
The first port of call when trying to answer this question is the company’s latest earnings report, which was released after the bell rang to end Monday’s session. The headline numbers looked decent, with topline revenue coming in ahead of what analysts were expecting and showing growth of 22% on the year, while bottom-line EPS was also ahead of the consensus.
Founder and CEO Eric Yuan summed up the quarter nicely when he said,
“In the fiscal year 2022, we delivered strong results with total revenue of more than $4 billion growing 55% year over the year along with increased profitability and operating cash flow growth as our global customer base continued to grow and find new use cases for our broadening communications platform.”
Still, he must find the current share price a tough pill to swallow. So too must investors, who sent shares lower after the release, suggesting that even after the massive sell-off they’ve experienced, shares are still overpriced. They dipped down close to a post-pandemic low in Wednesday’s session and were looking soft again in Thursday’s pre-market action. It seems that the company’s outlook for the quarter and year ahead is being viewed with some skepticism by investors, who are not fully convinced Yuan and his team know how to succeed without COVID.
Citi analyst Tyler Radke cut his price target on Zoom shares after Monday’s release while keeping his Neutral rating unchanged. He felt the company’s revenue forecast “could have been worse” and is cautiously optimistic their sales will pick up in the second half of the year. At the same time, however, Radke noted that Zoom's fourth quarter had the "smallest level of revenue upside seen to date and there were some customer metrics that showed signs of pressure and declined quarter-over-quarter.”
Potential Upside
The team at Morgan Stanley struck a more bullish tone and maintained their Overweight rating on Zoom shares. Analyst Meta Marshall believes "the platform Zoom has built can generate double-digit growth for multiple years as new product usage grows.” Marshall’s price target of $165 should be enough to grab the attention of many investors with its suggested 40% upside from current levels.
A lot will depend on how well the company can compete with the likes of Microsoft (NASDAQ:MSFT) Teams. This is something Morgan Stanley (NYSE:MS) has been watching, and a note they issued last month pointed out that “growing interest in Teams isn’t leading to Zoom cancellations. Zoom’s position has been underappreciated by the market.”
But this will be an uphill battle as Zoom is already very much on the back foot. If its shares can manage to put in a low in the coming weeks, there might be an argument for a recovery rally play. One of the few good things about the ongoing sell-off is that it has brought Zoom’s price-to-earnings ratio back down to earth, and its current level of 27 makes it a lot easier to buy than when it was in the triple digits.