Zoom Video Q4 preview: Where next for Zoom stock?

Josh Warner
By :  ,  Market Analyst

When will Zoom report Q4 earnings?

Zoom Video Communications will report fourth quarter and full year results covering the year to the end of January 2022 after US markets close on Monday February 28.

 

Zoom Video Q4 preview

Zoom Video shares still trade well above pre-pandemic levels but have plunged over 77% since peaking at the height of the coronavirus crisis in 2020. The surge in interest in stay-at-home stocks during lockdown meant the company boasted a valuation of over $159 billion back in October 2020 but today that sits closer to $38 billion.

Zoom believes it is in the perfect position to capitalise on the structural changes the pandemic is causing by normalising remote and hybrid working and growing the need for unified communications to bring everything altogether, but that has not stopped it losing allure with investors as offices continue to reopen and they shift their money into stocks with greater recovery potential.

Plus, it is clear that the hype around Zoom caused its valuation to spiral to unprecedented heights during 2020. Its valuation looks far more realistic today considering it is equal to around 26x forecasted EPS in 2021. That compares to the 32x trailing 12-month average of the Nasdaq 100 and the 38x of the Nasdaq 100 Tech Sector Index, according to Bloomberg figures. In fact, brokers argue the selloff in Zoom Video shares over the past 16 months has been overdone considering the average target price of $279 implies the stock can more than double over the next 12 months – but the most recent updates implies there is more moderate upside potential with target prices coming in below $200.

Growth is understandably experiencing a slowdown as Zoom comes up against the tough comparatives seen when demand exploded in 2020 as businesses rushed to shift online and needed remote communication systems and this will continue to weigh on sentiment until things normalise and the rate of growth stabilises.

Wall Street forecasts Zoom will report a 19% year-on-year rise in fourth quarter revenue to $1.05 billion, broadly level with the previous quarter but marking the slowest year-on-year growth in 2021.

The number of customers with over 10 employees is expected to have risen to 527,303 by the end of December from 467,100 a year earlier, while the number that contribute over $100,000 in annual revenue for Zoom is expected to rise to 2,735 from 1,644. Meeting these targets is key to installing confidence that larger businesses continue to regard Zoom as an indispensable tool even as the pandemic eases. Although it is still delivering significant growth in the amount of larger customers it has on its books, the rate of acquisition is also slowing.

Diluted net income per share is expected to drop 12% year-on-year to $1.07, also marking its weakest quarterly profit performance in over a year.

For the full year, Zoom has said it is targeting revenue of $4.079 to $4.081 billion and EPS of $4.84 to $4.85. That would be up from just $2.65 billion in revenue and EPS of $3.34 in the previous financial year.

Investors understand growth will continue to slow in the current year. Wall Street currently forecasts revenue will grow just 16% in the year to the end of January 2023 and that EPS will fall 8.4%. With that in mind, they will want to see some new catalysts introduced to help prop-up growth and that may come in the form of M&A. Five9 shareholders rejected the deal tabled by Zoom to merge the two companies together last year and it is likely that Zoom is still keen on expanding into the Contact Centre-as-a-Service (CCaaS) market and bundling its products with more services to widen appeal and make it more vital for businesses around the world.

 

Where next for ZM stock?

Zoom shares have been steadily falling since peaking back in October 2020, with the most recent downtrend having started in early November 2021. Shares currently trade at a 22-month low, having given back the vast majority of gains booked throughout the pandemic.

We could see the stock continue to decline toward the $97 level of support that emerged in February 2020 if the current downtrend continues, with a move below $100 likely to break a key psychological barrier. The fact the 50-day sma continues to trade below the 100-day sma (which in turn remains below the 200-day sma) supports the view that the stock could continue to come under pressure going forward.

However, there are signs that the current downtrend is running out of steam. The fact the stock has slipped lower despite the RSI rising higher signals a bullish divergence and the RSI has just slipped into oversold territory. Average volumes have also declined over the past 100 days.

The stock needs to break out of the most recent downtrend to signal a move higher. Shares have struggled to remain above the 50-day sma, which currently sits at $162, for too long over the last five months so this is the first level that needs to be recaptured. That would be significant considering it would open the door to the 100-day sma at $205, in-line with the December high.

The Zoom share price has continued to fall in 2022

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