Zoom Video Communications (NASDAQ: ZM) saw its stock soar to new highs in 2020 amid the coronavirus pandemic. While people and businesses struggled to find ways to communicate securely and remotely, Zoom Video offered a convenient and affordable platform at the right time.
However, with people starting to be vaccinated against COVID-19, the need for video communication options may be reduced in the future. This trend may cause Zoom Video shareholders to wonder whether the good returns the company has generated in recent quarters will be difficult to maintain.
Analyzing the bullish and bearish arguments for Zoom Video can help investors decide whether they want to continue investing in this currently high technology stock.
Image source: Getty Images.
The case of Zoom Video
As most people already know, Zoom Video was one of the darlings of the coronavirus pandemic. Unlike most companies, Zoom Video’s stock price skyrocketed higher in February as people and businesses turned to its video app to connect with others.
Zoom’s stock has increased by about 500% in the year to date. The latest earnings report showed an increase of almost 370% in revenue. Net income grew 10 times, albeit from a low base point.
ZM data by YCharts
Forecasts for the fourth quarter were for revenue growth above 315% year on year. Analysts projected that diluted earnings per share (EPS) would increase at least five times in the same period.
In addition, as far as investors can tell, Zoom Video stands up well to its most prominent competitors. Skype is owned by Microsoft and LogMeIn, the owner of GoToMeeting, is a private company. Microsoft does not provide specific revenue and profit data for Skype. Therefore, the main competitor that provides data is Cisco, the company that operates Webex.
However, Cisco offers only a limited view of Webex performance. In the last quarter, management reported that the use of Webex has almost doubled, to about 600 million since March. However, the division where it resides, apps, experienced an 8% drop in revenue year on year. This is exactly the opposite of Zoom, which increased revenue relatively easily.
Why Investors May Want to Ignore Zoom Video
Still, we may have reached a point where Zoom will struggle to maintain investor interest. Zoom Video’s shares were trading at a point this year above 750% above. The shares were partially sold in October, as successful vaccine tests sparked fears that people would not use the platform so often.
Admittedly, COVID-19 gave companies time to test the concept of online meetings. From these tests, it seems likely that this form of engagement is here to stay. However, it can still be assumed that interest in using the platform will decrease as more meetings are allowed again.
For the next fiscal year, which begins on February 1, analysts predict that Zoom Video’s earnings will increase by just 3%. Even if this forecast is very low, it is unlikely to correspond to the eight-fold increase forecast for the current fiscal year.
In addition, revenue forecasts have doubled approximately in the previous three fiscal years. Thus, we can assume from the revenue growth of more than 300% this year that the company realized much of its anticipated revenue gains in advance.
In addition, investors may be hesitant to pay nearly 130 times future earnings, at a time when growth will almost certainly slow.
Is Zoom Video a good option?
While Zoom’s calls are likely to stay, I don’t think investors should rush to buy these shares.
I realize that when the final 2021 tax figures are released early next year, the company will almost certainly experience massive revenue and profit growth. Still, COVID-19 may have anticipated much of that increase. This is probably why analysts forecast earnings growth of just 3% in the calendar year 2021.
I expect growth to accelerate again from the calendar year 2022. However, it may not bring a sufficient increase to justify the current assessment. In addition, video conferencing is a restricted business. Therefore, it is not yet clear how long Zoom Video will run ahead of its numerous competitors.
As video conferencing becomes a commodity, video conferencing companies like Zoom Video will have a hard time maintaining current ratings. While Zoom lives up to its name now, investors will be able to watch it choke over time.