The Zoom [ZM] share price fell 11.57% in the year so far to close 3 September at $298.29. On 30 August, it closed 3.02% up for the year at $347.50. A strong second-quarter earnings report, in which both revenue and earnings beat analyst expectations, saw the stock counter-intuitively plummet on 31 August, losing over 16% to close at $289.50.
This year, Zoom has underperformed other work-from-home stocks. The Direxion Work From Home ETF [WFH], which has a 1.97% weighting in Zoom as of 6 September, gained 18.54% in the year to 3 September, and 49.38% over the trailing 12 months.
Following August’s earnings announcement, many investors concluded that growth for the Zoom share price had reached its zenith and it was time to cash in.
However, according to a recent FactSet survey, those sellers may have been premature. Consensus estimates among analysts in the survey suggested that Zoom’s revenue will increase at a compound annual growth rate (CAGR) of 21.7% for the next three years.
The FactSet survey lists Zoom as one of 30 stocks that boomed during the pandemic and are set for a CAGR of 20% or more over the next three years. Top of the list was Virgin Galactic [SPCE], whose expected $2m revenue in 2021 was predicted to reach $265m in 2024, a CAGR of over 400%. Electric vehicle charging operator ChargePoint Holdings [CHPT] was tipped to grow at a CAGR of 62.0% from $202m to $860m in the same period.
The Virgin Galactic share price, having fallen from a peak following its first successful test flight, closed 3 September 2.32% up in the year to date. ChargePoint has struggled, and closed 3 September 45.08% down through the year to date.
Could the prospect of ongoing sales growth boost the Zoom share price?
Victim of its own success
Zoom’s revenue increased 54% in the recent earnings report. This would normally have driven its price up, but after multiple quarters of 300% revenue growth, it had the opposite effect. The 3 September close saw a PE ratio of 87.87, but a few days before the earnings report it was 104.99. With revenue growth slowing, investors lack confidence that the company’s revenue growth can justify this multiple.
Yet according to data from WhaleWisdom, hedge fund positions in Zoom have held steady since April. The big sell-off may even have created a buying opportunity. Zoom’s share price is currently well below its moving averages for the past 200 and 50 days: in fact, it is at its lowest level since mid-May.
If Zoom’s revenue does continue to grow at the rate FactSet analysts have predicted, it will top $7bn in 2024. There’s no reason to believe it won’t. Hybrid working looks set to continue, and the user numbers in Zoom’s latest earnings report demonstrate that its customers are sticky. Among major video conferencing platforms, Zoom has proven the easier for businesses and individuals to adopt, with a simple sign-up process and adequate security.
It is the dominant virtual meeting platform in 44 countries, as per data on EmailToolTester, and grew its market share from 26.4% in 2020 to 48.7% in 2021.
The video-conferencing industry is meanwhile set to continue to grow from $9.2bn in 2021 to $22.5bn in 2026, at a CAGR of 19.7%. Another industry that surged during the pandemic, healthcare and life sciences, is set to drive much of this growth, by leveraging the potential of video conferencing to exchange accurate clinical, administrative and financial information and improve patient care by increasing communication options.
Despite growth prospects analysts are split on the Zoom share price, with 13 of the 28 polled by CNN Money recommending ‘buy’ and another 13 recommending ‘hold’. Of the remaining two analysts, one gave an 'outperform’ rating and the other a ‘sell’ rating.
Among the 20 analysts offering 12-month price targets, the median target was $372.50, implying a 24.87% upside compared with the 3 September close. The high estimate of $469 implies a 57.23% increase, while the low estimate of $145 implies a 51.38% decline.
As the paradox of the post-earnings beat selloff shows, markets are in two minds over the Zoom stock price at present. Its technical indicators are currently worrying, but many believe it has the fundamentals to deliver a positive share price surprise over the coming months.
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