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Analysis

Zoom share price: deceleration on the horizon?

CMC Markets

Last night Zoom Video Communications posted its third-quarter numbers. Revenue surged by 367% to $777.2m, topping the $694m consensus estimate. In the previous quarter the company saw revenue growth of 355%, which highlights that growth momentum is strong. Earnings per share was 99 cents, easily topping the 76 cents consensus estimate.

The Zoom share price exploded in 2020 thanks to the pandemic, as teleconferencing saw a colossal surge in demand on the back of a rise in working and studying from home. Last night's Q3 results saw the stock jump to just under 480p.

Zoom share price boosted during pandemic

Zoom’s share price stood out from the crowd back in February and March as it began its ascent to a series of all-time highs, while global equity markets were plunging.

The stock underwent an extremely bullish run from March onwards as the health crisis really became a global issue. The Zoom share price hit an all-time high in October and it has cooled since then. Last month the stock came under some pressure on the back of the announcements from various pharma companies that they are making great progress in developing potential vaccines for Covid-19.

After the updates, Zoom and other companies that benefitted greatly from the health crisis fell out of favour with traders as they funnelled their cash into traditional stocks like airlines, leisure and high-street retailers. Their logic was that those sort of stocks have arguably the most to gain from the virus being contained and Zoom might see demand fall as there might be a return to normal office or school life.

In reality it will probably take a long time for the drug to be mass produced and rolled out. Therefore we are unlikely to see a return to pre-pandemic life anytime soon so that should keep Zoom’s demand elevated.

Potential slowdown despite positive results?

The US company saw exceptional growth in less well-established markets. Europe, the Middle East and Africa posted revenue growth of 629%, while the Americas posted growth of 300% - albeit from a higher starting point. Last night’s update was extremely bullish but some elements that could suggest the business is cooling a little. The gross margin was 66.7%, down from 67.3% in the second quarter. For the fourth quarter, the company anticipates revenue of $806-$811m, which would imply growth of 329% - a decline from the 367% revealed last night.

Zoom’s share price has been rebounding since early November, and while it holds above the 50-day moving average at $468, the uptrend should continue and it could target $500. A break below $400 might bring $376, the 100-day moving average into play.                  


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