is-zoom-stock-a-buy-right-now?-guidance-disappoints-amid-higher-small-business-churn

Is Zoom Stock A Buy Right Now? Guidance Disappoints Amid Higher Small Business Churn

Yes, shares in Zoom Video Communications (ZM) soared during the coronavirus emergency. But what’s the outlook for Zoom stock as the U.S. economy normalizes?




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ZM stock tumbled Aug. 30 after it reported a smaller-than-expected July quarter revenue beat. In addition, Zoom stock forecast October quarter revenue below estimates amid higher turnover among small businesses.

Customers with fewer than 10 employees account for about 36% of revenue. On the plus side, Zoom gained traction in the enterprise market in the second quarter.

After a tough start to 2021, software growth stocks have rebounded. The iShares Expanded Tech-Software Sector ETF rose 3.4% in July and 8.7% in June. The software index has been flat in August.

Zoom on July 18 announced it has agreed to buy Five9 (FIVN) in an all-stock deal valued at $14.7 billion. Zoom had been expected to make an acquisition targeting the business call center market.

Started in 2001, Five9 automates call center services with website chatbots, or virtual assistants.

Zoom Stock: Five9 Deal Transforms Company

Bank of America analyst David Bartus is bullish on the Five9 deal.

“We name Zoom a top pick,” he said in a recent note to clients. “The control of internal and external communications should also better position Zoom to open the platform for application developers and create a marketplace. With a $5 billion cash position and 36% operating margins, we also believe Zoom has an attractive opportunity to do more potential M&A, outspend competitors, and extend its leadership position.”

Five9 stockholders will receive 0.5533 shares of ZM stock representing a price $200.28 as of July 16. Zoom’s offer is nearly 13% above Five9 stock’s closing price on July 16.

“While the premium for FIVN is modest, we think there is a low likelihood of a higher offer and expect that longstanding conjecture about the acquisition had already baked a premium into FIVN’s share price,” said RBC Capital analyst Rishi Jaluria in a report.

Five9 Chief Executive Rowan Trollope will become Zoom’s president. The deal is expected to close in the first half of 2022.

Zoom stock continues to make new product announcements targeting business customers. More could come at the virtual Zoomtopia user conference planned for Sept. 13-14.

ZM Stock: Competition With Microsoft, RingCentral Intensifies

ZM stock has been consolidating as investors weigh a surge in coronavirus cases in some countries versus positive vaccine news. In addition, competition with RingCentral (RNG) and Microsoft (MSFT) has intensified.

Five9 competes with RingCentral and Twilio (TWLO). Zoom had partnered with RingCentral in the business market.

The magnitude of Zoom Video’s revenue beats has moderated. In the first quarter, Zoom reported revenue of $956 million, topping analyst estimates by nearly 6%. In the four previous quarters, Zoom Video beat estimates by 64%, 33%, 13% and 9%, says an RBC Capital Markets report.

For customers with one to 10 employees, renewals are expected to slow as the economy reopens and shelter-in-place orders lift. There’s expected to be less turnover of larger customers.

While paid consumer subscribers are important, the company’s roots are in the enterprise market. Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.

Zoom stock has created a $100 million fund for app developers.

In addition, Zoom Video on June 29 hired former Microsoft executive Ricky Kapur as the head of Asia Pacific marketing. The same day, it acquired German startup Karlsruhe Information Technology Solutions. The startup provides real-time language translation tools that use artificial intelligence.

Zoom Stock: Customer Retention Key

When the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s continued success. Another will be its ability to convert free users into paying subscribers.

According to Morgan Stanley, Zoom garners about 50% of revenue from monthly payers. Zoom aims to convert monthly business subscribers to annual contracts.

Amid Covid-19, demand for Zoom videoconferencing software has surged as businesses told employees to work from home. Zoom morphed into a social phenomenon as making video calls became routine for consumers to keep in touch with family and friends. Distance learning as schools re-opened and needs in telemedicine also boosted demand for Zoom Video’s cloud-based services.

ZM stock bulls argue that video calling is here to stay and will play a much larger role in businesses, schools and everyday lives. Trouble is, Zoom rivals also think it’s a big market opportunity, and they don’t want Zoom to dominate.

In the business market, Zoom rivals include RingCentral, Cisco Systems (CSCO), Microsoft, LogMeIn and Fuze. Alphabet‘s (GOOGL) Google, Facebook (FB) and Verizon Communications (VZ) have pushed into the market.

On the consumer side, Zoom also faces stiff competition.

Zoom rolled out end-to-end encryption to address privacy concerns for free and paid users in October, in a move to set itself apart from rivals.

ZM Stock: The Ma Bell Of Video Calls?

Zoom’s cloud-based software sets up video calls, with chat tools also available. Also, customers can easily share content.

A “Zoom Meeting” refers to a videoconferencing session hosted on its cloud infrastructure. During the Covid-19 crisis, Zoom upped investments on computer servers as demand surged.

One key to Zoom’s success has been a “freemium” business model. Zoom’s basic video-calling package is free.

Zoom puts limits on the number of participants in a group call and the length of meetings. Often company management learns about Zoom’s software after an employee reports a positive experience. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.

Many companies like Zoom tools because they usually don’t require support from tech staff.

At the Zoomtopia user conference in mid-October, Zoom management didn’t update financial goals except for raising long-term operating margin targets to 25% from 20%. Also, the company introduced “OnZoom.” It’s an online event platform with paid admission.

Zoom Phone A Potential Market Disruptor?

Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats. Early on in the coronavirus crisis, Zoom offered online coupon codes with discounts.

The company’s privacy policy notes that consumer data is shared for targeted advertising.

Zoom Phone, a cloud-calling product rolled out in 2019, lets customers set up group internet phone calls without video. In addition, Zoom Phone competes with products from Cisco, Avaya and RingCentral. The Zoom Phone replaces traditional business PBX phone systems.

When Zoom reported first-quarter earnings, it disclosed that Zoom Phone had 1.5 million users as of April 30, up 500,000 from the end of 2020.

Zoom cross-sells the Zoom Phone tools to business customers that already use its Meetings software. Bank of America analyst Daniel Bartus, in a bullish May 27 report, estimated that Zoom Phone could reach $2 billion in revenue by 2026.

In a move that should improve profit margins, Zoom recently renegotiated contracts with cloud computing services providers.

Zoom Chief Came To U.S. In 1997

Eric Yuan, Zoom’s chief executive and founder, came to the U.S. in 1997. He started out with WebEx Communications and eventually became its vice president of engineering. Cisco acquired WebEx for $3.2 billion in 2007. Yuan then became Cisco’s corporate vice president of engineering for collaboration software. He formed San Jose, Calif.-based Zoom Video in 2011.

Yuan recently transferred roughly 40% of his ownership stake in Zoom Video, 18 million shares worth an estimated $6 billion, as gifts to an unknown entity.

Zoom Video has built up alliances. Sales partners include Slack Technologies (TEAM), Salesforce.com (CRM), Atlassian (TEAM) and Box (BOX). Salesforce.com invested in Zoom stock prior to its initial public offering and reaped big gains. However, Salesforce recently sold off all of its shares in Zoom Video.

However, Zoom Video is forging new deals in the enterprise market, such as one with software maker ServiceNow (NOW).

Revenue growth decelerated in Zoom Video’s first four quarters as a public company, then skyrocketed in the April 2020 quarter amid the coronavirus crisis.

Zoom Stock Fundamental Analysis

Zoom reported second-quarter earnings and revenue on Aug. 30 that topped analyst estimates but its sales growth continued decelerating as more small and medium-sized businesses left as customers.

Zoom earnings rose 48% to $1.36 a share on an adjusted basis from a year earlier for the July quarter. Revenue climbed 54% to $1.02 billion, the company said.

A year earlier, Zoom earned 92 cents a share on sales of $663.5 million. Zoom stock analysts projected earnings of $1.16 a share on sales of $991.2 million.

The company said it had 2,278 customers contributing more than $100,000 each annually, up from 1,999 as of April 30.

For the current quarter ending in October, Zoom forecast revenue in a range of $1.015 billion to $1.02 billion vs. analyst estimates of $1.02 billion. Zoom said it expects adjusted per-share earnings of about $1.07 at the midpoint of its guidance vs. estimates of $1.10.

For full-year fiscal 2022, Zoom forecast revenue of roughly $4.0 billion, below estimates of $4.01 billion.

ZM Stock Historical Performance

The Zoom IPO in April 2019 raised $752 million, with shares priced at 36. ZM stock popped 72% on the first day of trading.

Zoom stock popped again on June 6, 2019, after the company’s earnings and guidance topped expectations. It hit an intraday high of 107.34 on June 20, up 198% from its IPO price. But by late June, ZM stock consolidated as some analysts questioned Zoom’s lofty valuation.

Zoom stock formed a cup chart pattern over nearly eight months, hitting a low of 60.97 on Oct. 23, 2019, down 43% from its all-time high.

ZM stock’s relative strength line began to improve in January 2020, before the coronavirus outbreak.

Zoom stock broke out on Feb. 18 that year from a cup-with-handle buy point of 93.40 as the coronavirus pandemic began to spread globally. ZM stock soared in March as the corporate shift to work-from-home boosted demand for its video-calling app.

Shares retreated in early April amid reports that hackers were breaking into Zoom meetings. The company added new security features to thwart the cyberattacks.

ZM stock weathered the bad publicity over “Zoom bombing” on video chats. The stock popped in late April when it disclosed that daily active participants had reached 300 million — counting some participants multiple times per day.

By May, Zoom Video became a cultural phenomenon.

ZM Stock Technical Analysis

On a weekly chart, Zoom bounced off its 10-week moving average in early August. The 10-week moving average often provides a new entry after a big run-up and stocks take a breather.

The Zoomtopia user conference in October 2020, meanwhile, received favorable reviews from analysts. Shares hit an all-time intraday high of 588.84 on Oct. 19.

However, ZM stock in late October sent sell signals. For one, it retreated more than 8% from the high-tight-flag buy point of 529.84.

In addition, Zoom stock dropped out of the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.

Zoom stock ended 2020 up more than 400%. On March 30, shares hit an intraday low of 302.32, down nearly 49% from the Oct. 19 high of 588.84. Not many stocks claw back from a correction that deep.

Zoom Stock: Is It A Buy Right Now?

ZM stock owns an IBD Relative Strength Rating of only 20 out of a best-possible 99.

In addition, Zoom stock holds an Accumulation/Distribution Rating of B-minus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling.

The rating, on an A to E scale, measures institutional buying and selling in a stock. A signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.

Meanwhile, Zoom stock has clawed back from a 10-month low of 273.20 set on May 11. But Zoom stock has not formed a new base.

For technical reasons, ZM stock as of Aug. 31 is not a buy amid the acquisition of Five9 and disappointing October quarter guidance.

Zoom Video is only one of many software growth stocks to monitor as “digital transformation” projects gain traction. In addition, there are many large-cap technology stocks growing at a fast rate.

Check out IBD Stock Lists and other IBD content to find dozens more of the best stocks to buy or watch.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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