The share price of Zoom Video Communications [ZM] has been one of the big winners of the COVID-19 pandemic.
Zoom’s video chat and conferencing service becoming the go-to service for companies, schools, governments, friends and family across the US and Europe. Zoom’s share price is up 329% in 2020 through 27 August, compared to a 7% gain for the S&P 500 and a 27.9% climb for the tech-heavy Nasdaq.
The gains have been consistent too, barring the market madness in March. During that time Zoom’s share price dropped 23% across two weeks of trading in late March through early April in the lead up to its Q4 2019 earning report.
Since the initial coronavirus-induced downturn in global stock markets began at the end of February, however, Zoom’s share price has trumped the market, gaining 180.7% from that point (through 27 August).
Will Zoom’s share price continue higher following its second quarter earnings report on 31 August?
Look to earnings
Ahead of the earnings, Zoom’s share price has performed solidly in the second half of August, gaining 20.3% since 14 August. This followed a slowing in the share price performance up to this date since mid-June, during which time it had been able to make few rallies.
Zoom stock’s renewed vigour appears to be due to positive sentiment ahead of the earnings release.
Analysts expect a surge in results compared with the previous quarter, with consensus estimates standing at $0.45 EPS and $500.2m in sales. That compares to an EPS of $0.20 for Q1. Sales also outperformed expectations in the last quarter after $328.2m was reported versus $203.5m expected.
The share price was further boosted ahead of earnings by a Morgan Stanley note which predicted that Zoom will once again deliver a “meaningful beat” over analyst’s consensus estimates on both EPS and sales.
Zoom's Q1 sales revenue
Alongside the note, Morgan Stanley raised its share price target by 25%. Notably however, this brought the price target up to just $240 per share. That represents a potential downside of 18.5% from its 27 August price.
In mid-August, RBC analysts gave a share price target of $300. In a note the firm stated: “While most investors are fearful of looking at names trading at 25x CY22E revenue, we remain very bullish on ZM and believe that this quarter once again has the potential to deliver much better than expected revenue upside versus consensus expectations… Zoom continues, unsurprisingly, to be a work from home beneficiary.”
More room to run?
Todd Gordon, managing director at Ascent Wealth Partners, who recently told CNBC: “Zoom has held in extremely well, a little bit of consolidation over the last couple of weeks, but we’re pushing higher on the back of news that Facebook [FB] in their videoconferencing Portal will actually support Zoom. Gordon believes that Zoom’s share price could move past $300.
“It’s just an unbelievable uptrend here in Zoom and as I’ve mentioned, we have just recently broken through this bit of consolidation, and we don’t see any reason why we should not be able to continue higher, moving up into the $300s and beyond,” Gordon said.
“It’s just an unbelievable uptrend here in Zoom ... and we don’t see any reason why we should not be able to continue higher” - Todd Gordon, managing director at Ascent Wealth Partners
Considering analysts’ consensus price targets, the share price’s monumental gains in 2019 and the fact its trailing 12-month PE ratio is a whopping 1,743.67, suggesting the stock is overvalued, investors might however be best to await a pullback in order to take advantage of any potential long-term upside in the stock.
The current consensus among 32 analysts polled by CNN is to hold the stock, a rating given by 13 analysts, while 11 rate it a buy, three outperform and five a sell. The median target of 24 analysts tracked by CNN is at $235. The highest share price target of those analysts is $300.