Can bumper earnings help Zoom’s share price recover?

Zoom’s [ZM] share price powered forward during the early months of the coronavirus pandemic, but the prospect of a return to normality has sent it into reverse.

In 2020, Zoom’s share price accelerated 250.9% from $161.97 on 27 May to a high of $568.34 on 19 October as lockdown saw remote working, distance learning and telemedicine all ramp up demand for its video communications technology.

Despite the uptick in demand, Zoom’s share price stumbled by the end of last year, dropping to $337.32 on 31 December as lockdown easing reduced the need for remote calls.

However, on 1 March 2021, the company reported a 369% leap in fourth quarter 2020 revenues to $882.5m and full fiscal year 2020 revenue growth of 326% to $2.65bn. At the end of the fourth quarter, customer numbers had jumped 470% to 467,100.

Zoom’s share price did dial up again to $444.51 on 16 February as a second wave of the virus hit, but it has since fallen to sit as low as $289.70 on 12 May as vaccine rollouts bring the hope of re-opened societies. It closed 27 May at $326.43, down 3.2% year-to-date, and down 42.6% from its October high.

Zoom’s share price has suffered alongside other highly valued tech growth stocks because of the threat of higher interest rates and inflation. As it prepares to release its first quarter results on 1 June, can the stock continue its recovery or will it reverse once again?

What will Zoom’s earnings show?

According to Zacks Equity Research, Zoom is expected to post quarterly earnings of $0.97 per share, marking a 385% year-over-year rise. Revenues are forecast to come in at $905.24m, up 175.8% from the same period last year. Trefis also estimates revenues above $900m, with earnings of around $1 per share.

“The IT software and service industry saw a boom in 2020 as the onset of the pandemic led people toward digitalisation. This momentum is expected to continue in the first quarter,” Trefis stated on 21 May. “The stock saw a fall when the pandemic eased in certain countries toward the end of 2020, as certain investors expected the growth to taper off once the pandemic faded.”

"The stock saw a all when the pandemic eased in certain countries" - Trefis

However, Trefis said that Zoom continued to record good results as 2020 ended, adding: “This sell-off has made the stock attractive. Going forward, we believe the company should benefit from many businesses contemplating a shift toward remote working even in a post-COVID-19 world.”

Analysts are also concerned about stalling growth. Alex Kurtz, an analyst at KeyBanc Capital Markets, said in a client note seen by Investor’s Business Daily that Zoom’s January quarter “represented 8% revenue upside versus consensus, compared to Q3 2021 at 12%, Q2 at 33%, and Q1 at 62%”.

According to Market Screener, 25 analysts have a consensus outperform rating on the stock, with an average target price of $416.05.

Bank of America has a buy rating on the stock, with analyst Jason Kupferberg stating that Zoom is well-positioned to expand from “video to all things communications and capture substantial share in the $88bn-plus communications software market”.

Video fatigue

There are challenges ahead, with Trefis stating that the company has “very few big-ticket customers”. This could make it vulnerable if smaller enterprises look to tighten their belts in the potentially difficult economic months ahead.

It could also complicate plans to convert more free users of its service to paid customers. At present, according to Morgan Stanley, Zoom generates circa 50% of revenue from monthly payers.

There is also plenty of competition in this area, with rival services such as Microsoft [MSFT] Teams, RingCentral [RNG] and Skype, and concerns over video call fatigue.

Even Eric Yuan (pictured above), CEO of Zoom, recently said “I’m so tired of that”, when referring to back-to-back video calls at a Wall Street Journal CEO Council summit.

“Sometimes it takes a highly destructive event like a pandemic to wake many of us up to the benefits of technology. Zoom was growing before 2020 happened, but it became a household name overnight when lockdowns started,” wrote Nicholas Rossolillo in The Motley Fool. “With business communications permanently altered in the last year, Zoom is in pole position in the cloud video industry.”

Investors can track Zoom’s progress in ETFs focused on software as a service (SaaS). The stock has a 4.25% weighting in the Global X Cloud Computing ETF [CLOU], which has risen 36.5% from $19.13 on 27 May last year to $26.11 at close on 27 May. It also has a 2.94% weighting in the iShares Expanded Tech-Software Sector ETF [IGV], which has climbed 37.7% from $258.38 on 27 May 2020 to $355.83 at close on 27 May 2021.