Zoom Video Communications stock is down about 14.1% so far.
As more employees return to the office, investors worry about Zoom's growth rates
Long-term investors should consider buying ZM shares around current levels
Investors in software application technology stocks Zoom Video Communications (NASDAQ:) have not started the new year on a high. ZM shares have fallen by more than 14% since the beginning of the year.
By comparison, the has fallen 10.2%. Meanwhile, the has fallen by 6.9% so far in January.
On February 16, 2021, ZM shares went over $450 to hit an all-time high. But in recent days, the stock has hit a 52-week low. The 52-week range was $156 – $451.77; ZM's current market cap stands at $47.1 billion.
The name of the video chat was one of the favorites of 2020, as working from home became a dominant investment theme. Most readers are familiar with Zoom's cloud-based software that allows users to make video calls. There are also chat tools available on the platform. Increased demand for telehealth services and distance education caused by the pandemic also caused a tailwind for Zoom stock in 2020.
However, with the rollout of the vaccine in early 2021, stocks of stay-at-home technologies such as Zoom came under pressure. Understandably, Wall Street is concerned about frothy valuation levels and future growth rates.
Zoom published Q3 figures on November 22. Revenue was $1.05 billion, up 35% year over year. Adjusted net income was $338.4 million, or $1.11 per share. Free cash flow was $374.8 million. A year ago it would have been $388.2 million.
About these numbers, CEO Eric S. Yuan said:
"Looking ahead, we expect to close the year between $4.079 and $4.081 billion in total revenue, representing approximately 54% year-over-year growth, alongside strong profitability and operating cash flow growth."
The San Jose, California-based company's communications group currently has more than 2,500 major clients, i.e. those enterprises that have generated more than $100,000 in revenue in the past 12 months. Zoom is now working to improve the platform with new applications.
Yet analysts point out that Microsoft's (NASDAQ:) Teams collaboration tools pose a major threat to Zoom's future growth.
Before the release of the , ZM stock was trading at around $242. Now Zoom stock is swapping hands at $157.23 as of Wednesday's close. outperform” rating, with an average price target of $304.96 over 12 months. Such a step would represent an increase of over 90% from the current level. The target range is between $200 and $643.
Analyst consensus estimates polled by Investing.com.
Chart: Investing.com
Also, according to a number of valuation models, such as those that consider P/B or P/S multiples or terminal values, the average fair value for ZM stock through InvestingPro is $226.12.
Evaluation of fair value by InvestingPro.
Source: InvestingPro
Meanwhile, we can look at Zoom's financial health as determined by ranking more than 100 factors against peers in the information technology sector. In terms of earnings health, it scores 5 out of 5 (top score). And its cash flow and growth health are at 4. Zoom's overall performance is rated "great."
Source: InvestingPro
Long-term investors who are not concerned about the short-term volatility in ZM stocks should consider investing at current levels. Their price target should be around $220 as indicated by the stock's estimated fair value.
Others who have experience with options might look to alternative strategies. For example, those who think that the Zoom stock decline could come to an end soon and that another bull leg could begin, might try a bull call spread.
However, most option strategies are not suitable for all retail investors. Therefore, the following discussion of Zoom stocks is provided for educational purposes and not as an actual strategy to be followed by the average retail investor. At the time of writing: $160.10
In a bull call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both branches of the trade have the same underlying stock (i.e. Zoom Video Communication) and the same expiration date.
The trader wants the ZM stock to increase in price. But the Zoom share is expected to rise moderately.
In a bull call spread, therefore, both the potential profit and the potential loss levels are limited. Such a bull call spread is established at a net cost (or net debit), which represents the maximum loss.
Let's look at this example:
For the first leg of this strategy, the trader can buy an at-the-money (ATM) or somewhat out-of-the-money (OTM) call option, such as the ZM April 14 170 strike call. This option is currently offered for $14.10. It would cost the trader $1,410 to own this call option which expires in just under three months.
For the second part of this strategy, the trader sells a Zoom call, such as the April 14th 180 strike call. The current premium of this option is $10.45. The options seller would receive $1,045 excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread $3.65 ($14.10 – $10.45 = $3.65).
Since each option contract represents 100 shares of the underlying stock, i.e. ZM, we need to multiply $3.65 by 100, which gives us $365 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the Zoom stock price on expiration is below the strike price of the long call (or $170 in our example).
Maximum Profit Potential
In a bull call spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $10 ($180 – $170 = $10). And as we saw above, the net cost of the spread is $3.65.
The max profit is therefore $6.35 ($10.00 – $3.65 = $6.35) per share, minus commissions. When we multiply $6.35 by 100 stocks, the maximum profit for this option strategy is $635.
The trader will realize this maximum profit if the ZM share price is equal to or higher than the strike price of the short call (higher strike price) at expiration, or $180 in our example.
Short call positions are typically assigned on expiration if the stock price is above the strike price (i.e. $180 in this example). However, there is also the option of early placement. Therefore, the position should be monitored until expiration. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long call (i.e. $170 in our example) plus the net premium paid (i.e. $3.65 here) would give us the breakeven ZM price.
In our example: $170 + $3.65 = $173.65 (minus commissions).
Bottom line
Zoom stock, a pandemic darling during the early days of the global outbreak, has been battered in recent months. Still, Wall Street agrees that despite the short-term jerkiness in stocks, the growth trajectory remains intact for the communications platform, as many companies are likely to still rely on its product offerings. Please note that Zoom may also become an acquisition candidate in the future.
