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Is Zoom still a buy? Let’s find out in this Zoom Stock Forecast.
Zoom Stock Forecast: Background
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.
Zoom Stock Forecast: 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 Forecast: Economic 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.
Zoom Stock Forecast & Analysis: Q3 Earnings
Zoom reported Q3 earnings on November 22, 2021. Let’s look into the numbers.
- Earnings: $1.11 per share vs $1.09 per share estimated
- Revenue: $1.05 billion vs $1.02 billion estimated, up 35% year-over-year
- Net Income: $340.3 million, up 71% year-over-year
The quarter marked Zoom’s slowest growth in revenue since 2018. Granted, it was from extremely high levels thanks to pandemic-induced tailwinds.
However, the company reported that over 2,500 customers are spending more than $100,000 a year, up from 94% from the same period a year earlier.
Zoom Stock Forecast: The 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)
- 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.
Zoom Stock Forecast: The Risks
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.
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?
- Can Zoom add more productivity tools without jeopardizing its simplicity?
- 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.
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.”
Bottom Line: Zoom Stock Forecast
If you’re a long-term believer in Zoom, its recent dip is a great buying opportunity.
Paraphrasing 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.
This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we researched Zoom stock.