It seems that Zoom Video Communications (NASDAQ:) is falling victim to its own success. Following signs that the video conferencing platform's pandemic growth is coming to an end as schools and offices reopen, investors have been punishing the stock.
On Tuesday, shares of the San Jose, California-based company fell about 17% after management provided a current quarter sales forecast that fell short of some analysts' estimates.
The stock closed yesterday at $290.86, down more than 12% for the year after doubling fivefold in 2020 as usage of its communications platform exploded amid the pandemic. But that rapid growth is slowing down sooner than many analysts had predicted.
Zoom revenues increased 369% in the fiscal fourth quarter of 2020, 191% in the first quarter of 2021 and 54% in the quarter ended July 31. The company's forecasts indicate that sales could rise by just 15% in the fiscal fourth quarter.
Amid this rapid turnaround and difficult comparisons to blockbuster performance over the past year, the challenge for Chief Executive Officer Eric Yuan is to convince investors that growth will not stop in the post-pandemic environment.
Yuan is trying to diversify Zoom's offerings. He has added premium products, such as a cloud-based phone system, to appeal to larger businesses, as well as small and medium-sized businesses.
Income Diversification
In July, the company agreed to transfer Five9 (NASDAQ:) for $14.7 billion to expand in the call center software market. The acquisition helps Zoom expand into the cloud-based contact center market, which operates over the Internet. According to the company, adoption of the technology has accelerated during the pandemic, when many contact center workers were working remotely.
Some analysts and investors believe that Zoom will remain relevant in the new work and educational environment, and investors should stick with this stock. According to a Bloomberg report, tech investor Cathie Wood was apparently unimpressed by Zoom's decline, as her ARK Investment Management bought nearly 200,000 shares of the video conferencing company for at least two of its exchange-traded funds. ]
The well-known investor said in July it would be a "mistake" to sell stay-at-homes like Zoom as demand dwindled due to the pandemic.
However, the weak sales guidance led to many downward ratings from Wall Street analysts. Bank of America, which has a buy rating on Zoom, lowered its price target of $480 from $480 to $385. A note to customers read:
"We believe Zoom's 2H22 represents a transition period with lower growth as [small and mid-size business]/consumer becomes a significant headwind, masking stronger trends for businesses that are likely to drive a growth acceleration in FY23."
Baird, who has an "outperform" rating on Zoom, also lowered its price target from $445 to $380 after the latest earnings report, saying stocks have become attractive after the recent decline.
The note to customers stated:
“The company cited weaker online expectations of small and medium-sized businesses (SMEs), especially consumer use, as travel and in-person activities have increased. While disappointing, the enterprise and Zoom Phone trends remain strong and support our optimistic long-term view of the platform opportunity. SME uncertainty could remain an overhang in the near term, although we view equities as attractive for long-term investors."
Bottom Line
Zoom's growth slows after an unusual peak during the pandemic. That means investors shouldn't expect a repeat of last year's kind of rally in 2021. But there is near consensus in the market that the company has a bright future in the post-COVID world, making its stock a suitable candidate for long-term investors after the current weakness.
