Zoom (ZM) Stock Forecast and Analysis

Investing
Updated: 3rd Jun 2021
Written by Sean Graytok
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June 3, 2021
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Zoom was one of the best performing “pandemic stocks” for obvious reasons, but its share price has been cut in half over the last few months.

So, is Zoom stock a buy or sell? Let’s find out in this Zoom Stock Forecast and Analysis.

What is Zoom?

Zoom is a peer-to-peer cloud-enabled video chat service that is used for videoconferencing, telecommunicating, distance education and social relations.

It was founded in 2011 by Eric Yuhan and has become one of the most popular software-as-a-service (SaaS) companies.

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Zoom Stock Investment Potential

#1. Forced Digitization

The pandemic accelerated digital adoption for both companies and individuals, and Zoom might have been the biggest winner.

Whether it be for a family holiday party or an executive board meeting, people were turning to Zoom to make it happen.

This forced people who might have resisted digital adoption to use and become comfortable with the new technology. This type of adoption benefited Zoom, but it represents what we’ll call “adoption on the margins.”

The type of adoption that will benefit Zoom long-term is the normalization of digital/remote meetings and work.

Companies replaced cross-country flights with a Zoom meeting ID and password when business travel shut down, which saved all parties (except Delta) time and money.

While certain meetings will always have to happen in person, others might not require four plane tickets, car service, per diem, and three nights at a Marriott.

Zoom will benefit if the normalization of remote meetings lasts.

#2. Superior Product

The market picked Zoom because it’s the best product for its use case.

In the early days of the pandemic, companies were scrambling to find the best software products that allowed them to keep doing business.

There were a handful of options on the market, but Zoom won by a landslide and remained at the top.

This was not an accident and happened for a variety of reasons. One is its simplicity — click a blue link, and you’re in the meeting. Simple.

Then network effects set in, and Zoom spread like wildfire.

#3. Verb Status

Zoom reached “verb status” overnight — evidence of mainstream adoption and a multiplier effect that further embeds a product or company into the zeitgeist.

The company benefits every time someone says “Let’s Zoom” or “Can we Zoom” because it reinforces brand awareness and its dominance in the market.

Other notable companies to reach verb/noun status are Google (GOOG), Airbnb (ABNB), PayPal (PYPL), Netflix (NFLX), and Uber. This is a pretty elite group.

Zoom Stock Moat

A company’s moat refers to its ability to defend its position in the market from challengers. A strong moat means it’s difficult to replicate the aspects of a company that make it special.

The following combination of traits describes Zoom’s moat:

Winner Take Most Market + Trauma Bonded Trust

Zoom competes in a winner-take-most market where the majority will choose the minority.

Once these handful of winners are established, it’s extremely difficult for them to be replaced due to network effects, user routine, and trust.

It’s unlikely that Zoom will be usurped by another Zoom-type company — a small, agile challenger that attacks a narrow niche. Zoom’s moat protects from this genre of competition.

It’s more important to consider Zoom’s moat against the other winners in this market, like Microsoft and its Teams offering. This is where the next component of Zoom’s moat will have to kick in.

Zoom delivered during trying times and allowed companies to continue operations during the health crisis. Zoom established trust with its customers during incredibly stressful times.

However, Zoom’s product in and of itself is not that sticky in terms of corporate customer retention — which is a trade-off from its ease-of-use that contributed to its initial adoption.

SaaS companies like Salesforce (CRM) and Palantir (PLTR) embed their software into the fabric of a company and make it difficult for enterprises to switch products.

Zoom would not exist if it deployed this strategy because it would have handicapped adoption and contradict its product-market fit.

But the company is vulnerable to large challengers that are willing to play the long game and poach existing Zoom customers.

Zoom will have to rely on the trust it built during the pandemic to prevent customers from leaving its platform.

See: Tesla Stock Forecast

Zoom Stock Analysis

Zoom recently reported its financial results for the first quarter of fiscal year 2022. Let’s look at the highlights from the call and hear from the company’s executives:

  • Earnings: $1.32 per share, vs. 99 cents per share expected
  • Revenue: $956.2 million vs. $906.0 million expected
  • Revenue rose 369% from the previous quarter
  • Gross Margins widened to 73.9% from 69.4% in the previous quarter

Zoom’s guidance for Q2 ’22 exceeded expectations too – analysts were expecting to hear $931.8 million, but Zoom forecasted revenue as high as $990 million for the next quarter.

Zoom’s COO Aparna Bawa believes Zoom will play a key role in the “hybrid” working environment moving forward, a mixture between virtual and in-person.

Bawa added that the company’s new product “Zoom Rooms” will complement in-office meetings and productivity.

Zoom shares rose as much as 4% in extended trading following the call.

See: Square Stock Analysis

Zoom Stock Competition

Zoom participates in a highly competitive space; high-margin SaaS companies are flooding the market, and many focus on productivity tools.

In addition to these agile startups, Zoom must protect its market share from the best companies on Earth. FAAMG stocks offer similar products and can put them in front of hundreds of millions of people with a single click.

Here are Zoom’s top competitors:

  • Microsoft Teams & Skype (MSFT)
  • Google Meet (GOOG)
  • WebEx
  • RingCentral
  • Apple’s FaceTime (AAPL)
  • Facebook’s Workplace (FB)

The pandemic created a new market of software companies — Zoom’s largest competitor five years down the road might still be in incubation.

See: SpaceX Stock Analysis

Zoom Stock Risks

#1. Overvalued

Zoom’s price-to-sales ratio reached as high as 124x in the Fall of 2020. While SaaS companies typically have higher P/S ratios, the 2020 industry average for software companies was 11.40x.

Zoom’s valuation has significantly decreased since these highs, but it’s still one of the most pricey stocks on the market.

Zoom bears argue that the company and its stock price’s best days are behind it.

#2. Zoom Fatigue

In the “Investment Potential” section, we discussed the normalization of remote work. While remote work has increased, the degree to which it “sticks” will be a key metric for Zoom investors to watch.

Zoom Fatigue is real, and it’s unclear the degree to which remote work and ZM as an investment are related.

It’s entirely possible for Coinbase (COIN) to remain a remote-first company and ZM to fall another 20%. This is why investing is hard.

See: Shopify Stock Forecast

Zoom Stock Allocation in Your Portfolio

Step one is deciding whether or not to invest in Zoom. Step two is deciding how much to buy. The following question sight help you determine your allocation to ZM if any:

  • Is there better upside elsewhere?
  • Will Zoom outperform the S&P 500, Nasdaq-100 (QQQ), and bitcoin over the next five years? 20 years?
  • Can Zoom add more productivity tools without jeopardizing its simplicity?
  • Can Zoom fend off competition from FAAMG stocks like Microsoft?
  • Is Zoom on the right side of digitization?
  • Are pandemic trends that surged ZM here to stay (to the degree that will benefit Zoom)?
  • Which “groups” of enterprises need to adopt Zoom long-term for it to succeed?

There is an infinite number of questions we can ask. It’s important to conduct your own research, but don’t allow analysis paralysis to keep you on the sidelines.

If Zoom is causing pain in your lower back, there are plenty of more conservative investments like an S&P 500 ETF.

See: CrowdStrike Stock Analysis

Bonus: Stock Tip from The Motley Fool

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Learn More: The Motley Fool Review

Zoom Stock Forecast FAQs

Is Zoom stock a buy?

Zoom is down nearly 44% since its all-time high in October 2020. Some investors are buying the dip and doubling down on Zoom stock. Others believe the stock’s best days are behind it.

Why is Zoom stock dropping?

Zoom was one of the best-performing stocks of the pandemic, rising a few hundred percent in just a few months. Zoom stock is falling for a variety of reasons. Shareholders may be taking some profits off the table. Or maybe rising interest rates are scaring investors out of high-growth tech stocks.

Is Zoom stock overvalued?

Zoom stock is overvalued based on traditional valuation metrics. Even for a high-growth tech stock, it has an eye-watering price-to-sales ratio that is well above the industry average. Rising interest rates make Zoom stock less attractive because it discounts the company’s future earnings. However, just because a stock is “overvalued” doesn’t mean it won’t become “more overvalued.”

See: Nvidia Stock Analysis

Bottom Line: Zoom Stock Forecast

If you’re a long-term believer in Zoom, its recent dip is a great buying opportunity.

Paraphrasing the great Ben Carlson, if you’re not buying more of your high conviction stocks when they free-fall, you’re probably better off owning an index fund.

Not Interested in Zoom? Check out these other Stocks:

This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok
Sean is a student of the financial and technology industry. He is interested in the people and companies who are driving the innovation that will change our future.