Has Zoom’s share price taken a leap too far?

Zoom’s [ZM] share price has exceeded all expectations, soaring from its $36 IPO price to a high of $281 in little over a year, an astronomical rise of 780%. While Zoom’s share price has dropped away slightly since then, it is still trading around the $244 level.

As most commentators have observed, Zoom’s share price is one of the few to have actually risen during the global coronavirus pandemic, which prompted increased use from both casual users and professionals. While we have been unable to socialise in real-life, Zoom stepped up as the perfect tool with which to connect with friends, family and colleagues.

While there’s been little interference so far, is Zoom’s share price due a pullback as lockdowns ease around the world?

How did Zoom perform in Q1?

Zoom impressed in its most recent results. Revenue came in at $328.2m, marking a 169% increase year-on-year, way above analysts’ expectations at $202.7m. Its EPS, reported at $0.20, comfortably exceeded the $0.09 forecast. Zoom also issued a bullish full-year outlook, with EPS tipped to be $1.21-$1.29 on revenue of $1.78bn-$1.8bn — nearly double the previous forecast. Achieving these numbers would likely see Zoom’s share price continue to rise.

Could Zoom’s share price be set for a fall?

Momentum stock could hit buffers

The rapid rise of Zoom’s share price’s means it can be classed as a momentum stock. The danger is that, as InvestorPlace analyst Nicolas Chahine puts it, “buyers took it too far, too fast”. 

Enforced lockdowns and quarantines have aided Zoom’s share price, with user growth estimates comfortably surpassed. And “therein lies risk”, according to Chahine, “until they convert them to paying customers. Most users I know will not pay to use Zoom, especially [with] so many free alternatives.”

He goes as far as suggesting they may need to “monetise the corporate clients more effectively than the retail users”. He notes Zoom “has corrected 7%, but it still is too high because it’s only 9% off its all-time high”.

Competitors lurk while technology is replicable

CMC Markets’ chief market analyst Michael Hewson, acknowledges Zoom’s success as a rare beast that was actually profitable at its IPO launch, but also suggests things could get tougher.

“Its main competition consists of legacy operators like Webex, LogMeIn and Skype, and Zoom’s offering does come across as much easier to use. However, Zoom’s success has also prompted its competitors to up their game, so the fledgeling IPO could find life a little more difficult as time goes by, putting the current valuation under more scrutiny with respect to whether it’s sustainable.”

Hewson adds: “The technology is easily replicable, a fact that management acknowledge, and it could find itself cannibalised in the same way Facebook did with Snapchat, with the introduction of Instagram Stories.”

“The technology is easily replicable, a fact that management acknowledge, and it could find itself cannibalised in the same way Facebook did with Snapchat, with the introduction of Instagram Stories” - CMC Markets’ chief market analyst Michael Hewson

So, is Zoom overvalued?

Salesforce, having invested $100m at Zoom’s IPO, sold all of its 2.8m shares in Q2 this year according to a recent regulatory filing. This suggests the cloud-based software firm believed it an opportune time to sell. Salesforce will certainly have profited – Zoom’s share price closed at $259.51 in June of Q2, a phenomenal 620% hike from its IPO. 

InvestorPlace’s Chahine believes Zoom’s share price is overvalued at its current level. “I’m not bearish on Zoom — I’m bullish from lower levels. I see better entries near $180 per share. There is support just below current levels, but ZM stock is vulnerable for dips thereafter.”

He does, though, offer an optimistic tone for the future: “Conversely, if the bulls can go above $276 then they can rekindle technical interest and have a chance at retesting highs.”

Time to sell Zoom?

According to CNN Business, the current consensus among 32 investment analysts is to Hold. The 24 analysts offering 12-month price forecasts for Zoom have a median target of $224, with a high estimate of $300 and a low of $156.25. The median estimate is a 19% drop from Zoom’s share price as of 18 August’s close.

Zoom has had a meteoric rise, positively impacted by the globally-enforced lockdowns, but there are challenges in terms of monetising its offering and, while competitors strive to up their game, Zoom’s share price could be facing a dip in the short-to-medium term. 

With Zoom’s Q2 results due on 31 August, shareholders will soon be able to decide for themselves whether or not the current share price is worth it.

Zoom share price vitals, Yahoo Finance, 19 August 2020