Zoom Video Communications Opportunity Amidst a Crisis

 “The Chinese use two brush strokes to write the word 'crisis. ' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity.”

- US President John F. Kennedy

So far, most investors have been caught up in the “danger” phase of the current global coronavirus pandemic crisis, with the vast majority of stocks falling in sync with the broader market. As traders (and the Western world more generally) acclimate to the “new normal” of sheltering in place to flatten the infection curve, they’re turning their attention to the investment opportunities offered by the crisis.

With hundreds of millions, if not billions, of internet-enabled people laying low in their homes, video conferencing software offers the opportunity to stay in touch for both personal and professional reasons…and when it comes to video conferencing companies, no stock has caught investors’ attention more than Zoom Video Communications (ticker ZM – quick note not to confuse this with unaffiliated microcap Chinese-based ZOOM Technologies (ticker ZOOM) which surged 1000% last week in a textbook example of irrational investor behavior).

Whether its digital businesses rapidly ramping up remote working capabilities, schools moving to online instruction, or friends just seeking to stay in touch through “virtual happy hours,” ZM has become the go-to provider for all video conferencing needs given its reputation for reliability and low-latency video. Perhaps most interestingly, to “zoom” has become a verb, like to “xerox” or “google” in eras past, entrenching it as a defining technology in the pandemic zeitgeist. To wit, the company’s app was downloaded by nearly 600,000 people…yesterday.

From a financial standpoint, there’s certainly no way a traditional value investor like Warren Buffett will be buying the stock any time soon. As of writing, the company sports a $42B market capitalization and is trading up over 150% from last year’s IPO in the $60 range. The company is profitable (barely), reporting just $0.05 in diluted EPS last quarter, but it now trades at over 50x sales.

In other words, much like Tesla (TSLA) or Beyond Meat (BYND) over the last year, ZM is the quintessential “story stock” that has captured investors’ attention amidst the current environment. With each of these stocks, there’s a compelling fundamental narrative, whether that’s the secular trend toward environmental awareness, healthier eating, the need to stay in touch amidst an unprecedented lockdown. Combined with the explosive rally in stock prices themselves, the narrative becomes a self-fulfilling prophecy for momentum traders looking to capitalize on the situation:

Source: TradingView, GAIN Capital

As with Tesla and Beyond Meat, there’s a long-term argument for a fundamental shift in favor of Zoom: even once the worst of the pandemic is behind us, many companies and individuals will be more comfortable using Zoom’s platform to conduct business and stay in touch with family and friends.

However, at current prices, the stock is likely “priced for perfection” and may be vulnerable in the longer term as new competitors enter its fast-growing industry (once again, similar to the scenarios we’re seeing playing out with TSLA and BYND). For example, Microsoft, which offers enterprise video conferencing capabilities through its Teams platform, trades at just 8x revenue as of writing.

Of course, long-term valuations are being thrown out the door in both directions as investors panic. From that perspective, ZM absolutely could extend its gains from here. Momentum traders may want to keep a close eye on short-term moving averages (such as the 8- and 21-day EMAs); as long as ZM remains above those indicators, the short-term momentum is in favor of the bulls looking through the danger and recognizing the opportunity.

 “The Chinese use two brush strokes to write the word 'crisis. ' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity.”

- US President John F. Kennedy

So far, most investors have been caught up in the “danger” phase of the current global coronavirus pandemic crisis, with the vast majority of stocks falling in sync with the broader market. As traders (and the Western world more generally) acclimate to the “new normal” of sheltering in place to flatten the infection curve, they’re turning their attention to the investment opportunities offered by the crisis.

With hundreds of millions, if not billions, of internet-enabled people laying low in their homes, video conferencing software offers the opportunity to stay in touch for both personal and professional reasons…and when it comes to video conferencing companies, no stock has caught investors’ attention more than Zoom Video Communications (ticker ZM – quick note not to confuse this with unaffiliated microcap Chinese-based ZOOM Technologies (ticker ZOOM) which surged 1000% last week in a textbook example of irrational investor behavior).

Whether its digital businesses rapidly ramping up remote working capabilities, schools moving to online instruction, or friends just seeking to stay in touch through “virtual happy hours,” ZM has become the go-to provider for all video conferencing needs given its reputation for reliability and low-latency video. Perhaps most interestingly, to “zoom” has become a verb, like to “xerox” or “google” in eras past, entrenching it as a defining technology in the pandemic zeitgeist. To wit, the company’s app was downloaded by nearly 600,000 people…yesterday.

From a financial standpoint, there’s certainly no way a traditional value investor like Warren Buffett will be buying the stock any time soon. As of writing, the company sports a $42B market capitalization and is trading up over 150% from last year’s IPO in the $60 range. The company is profitable (barely), reporting just $0.05 in diluted EPS last quarter, but it now trades at over 50x sales.

In other words, much like Tesla (TSLA) or Beyond Meat (BYND) over the last year, ZM is the quintessential “story stock” that has captured investors’ attention amidst the current environment. With each of these stocks, there’s a compelling fundamental narrative, whether that’s the secular trend toward environmental awareness, healthier eating, the need to stay in touch amidst an unprecedented lockdown. Combined with the explosive rally in stock prices themselves, the narrative becomes a self-fulfilling prophecy for momentum traders looking to capitalize on the situation:

Source: TradingView, GAIN Capital

As with Tesla and Beyond Meat, there’s a long-term argument for a fundamental shift in favor of Zoom: even once the worst of the pandemic is behind us, many companies and individuals will be more comfortable using Zoom’s platform to conduct business and stay in touch with family and friends.

However, at current prices, the stock is likely “priced for perfection” and may be vulnerable in the longer term as new competitors enter its fast-growing industry (once again, similar to the scenarios we’re seeing playing out with TSLA and BYND). For example, Microsoft, which offers enterprise video conferencing capabilities through its Teams platform, trades at just 8x revenue as of writing.

Of course, long-term valuations are being thrown out the door in both directions as investors panic. From that perspective, ZM absolutely could extend its gains from here. Momentum traders may want to keep a close eye on short-term moving averages (such as the 8- and 21-day EMAs); as long as ZM remains above those indicators, the short-term momentum is in favor of the bulls looking through the danger and recognizing the opportunity.