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Stock Watch

Will the Zoom share price continue to soar?

CMC Markets

The Zoom share price has been one of the major success stories of 2020. A recent IPO, the company first came to market just over a year ago, at $36 a share with a valuation of $9bn.

Unsurprisingly, investor enthusiasm for the company has risen massively during the Covid-19 pandemic. The new remote-working necessity made Zoom-calls ubiquitous during global lockdowns, sending Zoom’s share price up to within touching distance of $600 back in October, before slipping back to their current position at around $444.

Zoom’s share price shakes off early concerns

The biggest concern when the company did IPO was that the technology was easily replicable. But unlike a lot of its peers at the time, Zoom is actually profitable, which sets it apart as a company worth watching. There was also the fact that a lot of its competition, in the form of Webex, LogMeIn and Skype, are still pretty mediocre, with products which weren’t really their core offerings. The company’s user base has risen from 10m in December 2019 to 300m by April 2020, a testament to how quickly it became a go-to service during the pandemic.

Revenues have already more than doubled so far year to date and could well soar as high as $2.4bn for the current fiscal year. Investors will have to judge for themselves whether that justifies a market cap of $125bn. To put that in perspective, Zoom is now valued higher than IBM. In Q1 revenues came in at $328m, before moving even higher in Q2 to $663.5m, while profits rose to $186m. Investors will hope the Zoom share price moves in a similar direction after the Q3 results.

Zoom faces some growing pains

There is no doubt that Zoom has done very well, and the Zoom share price has been a standout performer since its IPO. However, there have been signs of growing pains in terms of its infrastructure. This may well need some investment to improve its resilience, after some outages in August.

Zoom’s security will also require investment, after the company were recently tackled by the Federal Trade Commission over ‘misleading’ claims of end-to-end encryption. Zoom has agreed to establish a “comprehensive security programme” to protect its users.

The welcome arrival of a Covid-19 vaccine may also put a dampener on Zoom’s share price, as a return to office working could be on the horizon, lessening the necessity for video conferencing.

Is Zoom’s valuation too high?

In light of these gains and the current valuation there is a sense that while Zoom has done very well this year, questions do need to be asked as to whether the company is worth over $120bn. For a start Zoom’s success has prompted its competitors to up their game, so the fledgling company could find it has to work that much harder to stand still as time goes by. This could well put the current valuation under slightly more scrutiny, among questions as to whether it’s sustainable at current levels. Q3 profits are expected to come in at $0.75c a share.

Zoom released its Q3 numbers on 30 November. Find out what happened to the Zoom share price here.


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