Will earnings push Zoom’s share price higher?

Zoom Video Communication’s [ZM] share price has displayed excellent growth through 2020, soaring 586.21% from the start of the year to close at $471.61 on 27 November. That’s not to say it’s been a perfect year for Zoom’s share price, though — its most recent close represents a 19.9% fall from the all-time intraday high of $588.84 that Zoom’s share price reached on 19 October. With the company preparing to publish its Q3 earnings report on 30 November, can Zoom’s share price sustain its star status?

Since its all-time high, Zoom’s share price has seen its fair share of ups and downs, slumping to $451.51 by 3 November, then recovering by 10.8% to $500.11 on 6 November before falling as low as $376.01 on 10 November.

The most recent closing figure for Zoom’s share price represents something of a rally from this slump and, with Q3 earnings imminent, investors are hoping for a positive set of results to continue the trend.

Remote prowess

Zoom’s Q2 2021 earnings report in August announced revenue of $663.52m and earnings per share (EPS) of $0.92, smashing analysts’ expectations. EPS was more than double the forecasts and revenue was 32.6% higher than the figure predicted by analysts.

The company’s fortunes have been tied to wider events this year, with Zoom’s share price performance linked closely to developments regarding the coronavirus pandemic.

A rise in US cases on 20 November is thought to be the main driver of a 6.1% jump in Zoom’s share price, whereas the Pfizer [PFE] vaccine announcement of positive test results sent Zoom’s share price down nearly 20% in early trading on 9 November.

This earnings report will be the first indicator of how successful several new products released during Q3, including Zoom Zapps and OnZoom, have been. Zapps enables integration with third-party apps, with Slack [WORK], Salesforce [CRM] and Dropbox [DBX] among the early adopters. OnZoom is touted as a marketplace for online events, with virtual tickets for up to 1,000 attendees per event purchasable through the platform. Rev brings its speech-to-text expertise into play with transcription and captioning functionalities, as well as subtitles in over 15 languages.

Meeting expectations

Zacks expects Zoom to improve on the $663.52m sales reported for Q2, with the consensus estimate of $694.51m representing a 4.7% increase on the previous quarter and a massive 316.9% increase year-over-year. Earnings are forecast to fall from the $0.92 per share achieved in Q2 to $0.75 per share, but this estimate still represents a 733.33% increase on last year’s equivalent figure.

Optimism outstrips pessimism in these forecasts. While the low estimates for sales and earnings respectively are only a little below the consensus values at $685m and $0.73 per share respectively, the high estimates of $729.87m and $0.85 are well above the consensus levels.

According to Zacks data, Zoom has exceeded analysts’ EPS expectations in each of its last five earnings reports, with an average positive surprise of 21.9% throughout the period.

So, despite the recent signs that economies are on the verge of a return to something like the old normal, investors will be hopeful that the figures announced on Monday are closer to bullish estimates than the consensus.

Confidence calls

Given the extensive growth potential for Zoom over the long term, the recent pullback in its share price could represent a small but significant buying opportunity, Niki Schranz wrote in Seeking Alpha.  

The analyst community as a whole is more reserved, with 31 analysts polled by CNN Money offering a consensus Hold rating, as recommended by 14 of them. That said, the trend is again towards bullishness, with only two analysts recommending to Sell the stock and 12 rating it a Buy. Three gave Zoom an Outperform rating.

Among 25 analysts offering 12-month price forecasts for the stock, the median target is $465. This would represent a slight 1.40% decrease on Zoom’s share price as of close on 27 November. While the bears among this panel see the stock falling as low as $315, a 33.2% decrease, the bulls see potential for the stock to rise as high as $656, an impressive 39.1% increase on 27 November’s closing price.

Zoom share price vitals, Yahoo Finance, 30 November 2020