Yes, shares in Zoom Video Communications (ZM) soared during the coronavirus emergency. But what's the outlook for Zoom stock as the U.S. economy normalizes?
XZoom's cloud-based software sets up video calls, with chat tools available. Also, customers can easily share content.
Amid Covid-19, demand for Zoom videoconferencing software 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. Remote learning and needs in telemedicine also boosted demand for Zoom Video's cloud-based services.
But growth has slowed as in-person meetings resume. When Zoom Video reported January-quarter earnings, it issued fiscal 2023 guidance well below expectations. Zoom forecast revenue growth of 11% versus analyst estimates for 15%.
Thus far in 2022, ZM stock has retreated about 36% amid volatility in the tech-heavy Nasdaq composite.
Further, a closely watched software benchmark — the iShares Expanded Tech-Software ETF (IGV) rose nearly 1% in March. It was the IGV's first positive month since October. But the IGV index is still down 13% in 2022.
For all of 2021, the IGV software index gained 12.3% vs. the S&P 500's nearly 27% advance. In 2020, the software index soared nearly 52% vs. the S&P 500's gain of 16.3%.
ZM Stock: Microsoft Teams Essentials A Threat?
ZM stock bulls argue that video calling is here to stay and will play a much larger role in businesses, schools and everyday lives. Problem is, Zoom rivals also think it's a big market opportunity and they don't want Zoom to dominate.
Microsoft (MSFT) looms as a big threat with its Teams collaboration tools. Microsoft recently rolled out a low-priced, standalone product called Teams Essentials. It targets small businesses. Google-parent Alphabet (GOOGL) also is a growing rival.
As the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom's success. Another is its ability to convert free users into paying subscribers. For customers with one to 10 employees, 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.
Zoom Stock: Five9 Deal Terminated
Zoom Video and Five9 (FIVN) planned to merge, announcing the deal July 19, which was an all-stock deal originally valued at $14.7 billion.
But the companies terminated the agreement on Sept. 30. The merger did not receive the votes needed for approval at a Five9 shareholder meeting.
Zoom stock fell sharply after the announcement. Started in 2001, Five9 automates call center services with website chatbots, or virtual assistants.
Zoom and Five9 said they will maintain their existing partnership. Zoom intends to focus on its own Video Engagement Center, or VEC, to participate in the contact center market via its own solution.
ZM Stock: Customer Retention Key
In the business market, Zoom rivals include RingCentral (RNG), Cisco Systems (CSCO), LogMeIn and Fuze.
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.
Zoom stock has created a $100 million fund for app developers.
In addition, Zoom Video on June 29 hired former Microsoft executive Ricky Kapur as the head of Asia Pacific marketing. The same day, it acquired German startup Karlsruhe Information Technology Solutions. The startup provides real-time language translation tools that use artificial intelligence.
According to Morgan Stanley, Zoom garners about 50% of revenue from monthly payers. Zoom aims to convert monthly business subscribers to annual contracts.
Zoom Stock: The Ma Bell Of Video Calls?
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 on 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 2020, Zoom management introduced "OnZoom." It's an online event platform with paid admission. In late 2021, Zoom acquired assets —event production tools — from startup Liminal.
Zoom Phone A Potential Market Disruptor?
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.
The company's privacy policy notes that consumer data is shared for targeted advertising.
Zoom Phone, a cloud-calling product rolled out in 2019, lets customers set up group internet phone calls without video. In addition, Zoom Phone competes with products from Cisco, Avaya and RingCentral. The Zoom Phone replaces traditional business PBX phone systems.
When Zoom reported first-quarter earnings, it disclosed that Zoom Phone had 1.5 million users as of April 30, up 500,000 from the end of 2020.
Zoom 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.
Zoom Video has built up alliances. Sales partners include Slack Technologies (TEAM), Salesforce.com (CRM), Atlassian (TEAM) and Box (BOX). Salesforce.com invested in Zoom stock prior to its initial public offering 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).
Zoom Stock Fundamental Analysis
Zoom earnings for the fourth quarter of 2021 were $1.29 a share on an adjusted basis, up 6% from a year earlier.
Revenue jumped 21% to $1.071 billion for ZM stock. A year earlier, the company earned $1.22 cents a share on sales of $883 million.
For fiscal 2023, Zoom forecast earnings of $3.48 per share on revenue of $4.54 billion. Analysts had estimated profit of $4.36 on revenue of $4.71 billion.
Zoom guidance assumes that fiscal 2023 revenue growth will likely trough in the July quarter and reaccelerate through the back half of the year.
Also, analysts had expected fiscal 2023 profit margins to fall amid higher investments in sales staff and research and development.
Zoom Video announced a $1 billion buyback. The company has a strong balance sheet with $5.4 billion in cash.
ZM Stock Historical Performance
The Zoom IPO 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 2020, before the coronavirus outbreak.
Zoom stock broke out on Feb. 18 that year 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 peaked at 588.84 on Oct. 19 2020. Zoom stock ended 2020 up more than 400%.
But Zoom stock retreated 45% in 2021.
Zoom Stock: Is It A Buy Right Now?
ZM stock owns an IBD Relative Strength Rating of only 6 out of a best-possible 99. The Relative Strength rating shows how a stock's price performance stacks up against all other stocks over the last 52 weeks.
Zoom stock holds an IBD Composite Rating of 45 out of a best possible 99.
IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
In addition, Zoom stock holds an Accumulation/Distribution Rating of B-minus, improving from E. 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.
As of April 4, ZM stock trades well below an entry point. To be actionable, Zoom stock needs to form a new base.
Check out IBD Stock Lists and other IBD content to find dozens more of the best stocks to buy or watch.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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