Shares of video conferencing tech firm Zoom Video Communications (ZM) suffered one of the biggest falls from grace over the past year. Many pandemic winners turned into massive losers, surrendering their massive 2020 gains and hurting those who got in on the action too late.
After suffering a 75% drop from peak to trough, ZM stock now finds itself right back to where it was in March of 2020. With no signs of negative momentum slowing, Zoom stock could join the likes of Peloton and other names that have sunk below their pre-pandemic highs.
With Omicron cases dwindling, many investors seem ready for COVID-19 to go endemic. While video-conferencing technologies are likely to take a hit in such a transition, I think the recent sell-off in the name is exaggerated. Hybrid work is probably here to stay, even as many return to the office.
Zoom Video is losing its most significant tailwind to date, one that it will never get back unless we return to the types of lockdowns we experienced in 2020 (doubtful at this juncture).
That said, Zoom is still poised to play a huge role in the ongoing digital transformation. Many employees have gotten used to working from home, and many are unwilling to return to the office. With such a battle for talent going on, employees are likely to get the flexibility they so desire.
With brilliant technologies powering Zoom’s video-conferencing technology and such a massive valuation reset, I’m not yet ready to give up on the stock. For now, I am bullish on ZM shares but am slightly wary of potential rivals that could emerge and cause even more pressure for the big pandemic beneficiary.
Zoom Video: There are Headwinds, but the Band-Aid May Have Already Been Ripped Off
The magnitude of Zoom stock’s decline is unprecedented. Looking back, the ZM stock bubble should have been obvious. The valuation was absurd, and the pandemic tailwinds were unlikely to last forever. Although the pandemic is still ongoing, it does seem like investors are preparing for a slow and steady push towards those pre-pandemic levels of normalcy.
Will pre-pandemic norms ever be reached, though? Probably not. The rise of remote work and the digital transformation is likely to continue moving forward, not backward, even if it’s completely safe to return to the office without the risk of contracting the coronavirus. For that reason, Zoom is still a great company to own for the long haul. With the modest 10.8 times sales multiple, the stock seems valued with low expectations in mind.
With a solid third quarter of earnings in the books, Zoom stock still cannot seem to form any sort of bottom. Investors don’t care for unprofitable (or high-PE growth stocks) anymore unless they’ve got realistic plans to rake in big profits sooner rather than later.
Indeed, these days, investors want more than just a quarterly beat. They want upbeat guidance. For the third quarter, Zoom reported a decent beat alongside upbeat guidance for its fourth and final quarter of 2021. Investors got the beat, and the outlook was also upbeat, yet the stock continued stumbling lower, dragged down by broader tech weakness.
What Could Help Propel ZM Stock Out of Its Free-Fall?
Perhaps the many innovative technologies going on behind the scenes could save the stock from falling. Indeed, Zoom isn’t just the one-dimensional company that many see it for. The firm has been busy working on innovative new offerings to upsell its current line-up of satisfied clients. While continued R&D expenditures could push profits further away amid rising rates, I do think that such investments could still pave the way for a higher pathway.
Zoom Phone, Zoom Rooms, and other intriguing offerings could allow the company a magnificent upselling opportunity as hybrid work remains dominant in the post-pandemic environment.
Although investors want to see progress on margins, I think Zoom is right to spend aggressively on innovations that will keep it relevant in the new era of work. Further, the metaverse is coming, and Zoom will need to place innovative capabilities ahead of profitability prospects. Sure, investors won’t like it, but long-term growth investors should.
Wall Street’s Take
Turning to Wall Street, ZM stock comes in as a Moderate Buy. Out of 27 analyst ratings, there are 13 Buys, 13 Holds, along with one Sell rating.
The average Zoom price target is $275.77, implying an upside of 99.1%. Analyst price targets range from a low of $182.92 per share to a high of $400.00 per share.
The Bottom Line on Zoom Stock
Despite the profound changing of the tides, Zoom continues to swim forward. At the end of the day, disruptive innovation, I believe, will support the stock, even if the trajectory of rates works against it and other growth companies.
Zoom faces profound industry headwinds and rising competition, most notably Microsoft (MSFT), which wants to go above and beyond video conferencing with its metaverse ambitions. Indeed, the metaverse-ready product Microsoft Teams Mesh could be the next step after video calls.
If it is, Zoom will need to pick up its game to remain on the cutting edge of the video-conferencing tech scene. Under the leadership of its visionary CEO Eric Yuan, I do think Zoom is ready to build on its pandemic-era strengths into the next realm, whether it’s the metaverse or some form of augmented reality.
In any case, Eric Yuan is a man that’s not to be underestimated. Chasing momentum to the downside could prove just as dangerous as chasing the stock’s upside momentum in the middle of 2020 when Zoom stock was all the rage.
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