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Zoom stock to gather strength after Q3?

Video communications group Zoom [ZM] expected to report slowing revenue growth in its third-quarter figures on 22 November as the world goes back to the office after the coronavirus pandemic.

Analysts expect the group to post revenues of $1.02bn during the period, which is up 31% from the same period last year. However, if accurate, this would be down from the 54% year-over-year growth reported in the second quarter and the 191% growth reported in the first quarter.

Zoom’s earnings per share are tipped to come in at $1.09 in the third quarter, which will be up from the $0.99 reported in the same period last year. However, it will be down from the $1.36 per share it reported in the second quarter.

 

 

 

Office clear-out

Zoom’s service was crucial in keeping remote employees engaged with each other during lockdowns. Its share price zoomed 735% higher between the start of January 2020 and mid-October 2020.

However, over the last 12 months to 18 November the price has dropped 38% as remote workers return to the office and dust off old meeting rooms, and friends and family hook up in coffee shops or the pub. As lockdowns end, there is less need for socially distanced video calls.

But Zoom is not entirely fading away from view. Encouragingly, its expected Q3 revenue numbers would be flat compared with its second-quarter results, which may mean that it is stemming some of the post-lockdown wounds.

735%

Zoom's share price growth January-October 2020

 

 

 New products

Analysts believe that its revenues have been boosted by increased use of Zoom Phone – which is a video-first, cloud phone system – particularly by businesses.

The group also has high hopes for Zoom Events, which allows businesses to create and host virtual experiences such as sales summits, trade shows and internal events.

More employers are also offering flexible or hybrid working practices, where employees divide time between their home and office, helping keep demand high for Zoom video.

With the Zoom Apps service, employers and employees can also utilise services such as whiteboarding, project management, note-taking, video games and sharing real-time meeting feedback and polling.

Zoom had hoped that a $14.7bn purchase of cloud contact-centre software provider Five9 [FIVN] would provide further diversity. The move was announced in the second quarter, but was ditched in late September after Five9 shareholders rejected the deal. Despite this, Zoom’s share price has climbed 6.9% since the start of November.

 

Analyst views on Zoom’s share price

Analysts remain bullish, and according to Market Screener, a consensus of 27 hold an outperform rating and a $348.86 target price.

“It was always going to be impossible for Zoom to match its pandemic-fuelled success,” said Benjamin Rains, an analyst with Zacks Investment Research. “Luckily, it’s still poised to grow with a vital non-email work communication space… Zoom remains essential to many businesses and other entities even as friends and family video chats have slowed down.

“Despite the slow return to offices — hampered by the delta variant — hybrid environments where people come in two to three days a week could possibly become the new normal for countless companies… Plus, Zoom enables businesses to cut back on travel.”

Indeed, that will appeal to businesses, not only from a cost-cutting point of view, but as part of meeting ESG commitments as net-zero carbon targets loom closer.

“...it’s still poised to grow with a vital non-email work communication space… Zoom remains essential to many businesses and other entities even as friends and family video chats have slowed down.” - Zacks analyst Benjamin Rains

 

JP Morgan has an overweight rating on the stock and a $385 target price. It believes that the market has already priced the post-pandemic hangover into the stock.

JP Morgan analyst Sterling Auty told TheStreet that Zoom’s growth will bottom out in the fourth quarter and then accelerate, due to increasing adoption by businesses.

 

Share price triggers

Analysts will be interested to hear more updates on the failed Five9 bid at the Q3 announcement and whether the group has any other acquisitions in the pipeline.

They will also look at business order numbers, particularly interest from large enterprises for Zoom Phone, Apps and Events and their views on what workplace communications will look like post-pandemic.

Zoom has plenty of room left to run.

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