Is Zoom A Buy Ahead Of Q4 Earnings Report Amid Job Cuts?

Yes, consumers flocked to Zoom Video Communications (ZM) during the coronavirus emergency. That’s when profits soared for Zoom stock. But that big run for ZM stock is long over.

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Can Zoom stock thrive once again as the company refocuses on corporate clients? In addition, Zoom Video aims to morph into a broader communications platform.

Fourth quarter earnings for ZM stock are due Feb. 27. Analysts estimate profit of 81 cents for Zoom stock, down 37% from a year earlier. Revenue is expected to rise 2.7% to $1.1 billion.

Fiscal 2024 revenue guidance will be key for ZM stock. Analysts project fiscal 2024 revenue growth of 4.5% to $4.6 billion.

Zoom Video on Feb. 7 said it will cut 1,300 jobs, about 15% of its workforce.

Zoom’s cloud-based software sets up video calls, with chat tools available. Also, customers can easily share content. But its growth in the consumer market will likely continue to slow amid rising competition.

Microsoft (MSFT) and its Teams communications tools for large companies and small businesses is Zoom’s major rival in the business market.

Software Stocks Lag S&P 500

Zoom recently rebranded its tools to Zoom Team Chat. It announced new integrations with Atlassian (TEAM) and ServiceNow (NOW).

In addition, stock-based compensation expenses will be a drag on ZM stock, said a recent Morgan Stanley note to clients.

“SBC expense will remain elevated for the next few years given the SBC amortization from the previous grants issued (during higher stock prices) in addition to the supplemental grants issued to make up for the declining share price,” the note said. “This remains an overhang to getting more positive, particularly as it grows as a percentage of free cash flow.”

As of Feb. 20, Zoom stock has climbed about 9% in 2023. In 2022, ZM stock retreated about 63% amid volatility in the tech-heavy Nasdaq composite.

A closely watched software benchmark — the iShares Expanded Tech-Software ETF (IGV) — has climbed about 8% in 2023.

Zoom Stock: Strong Balance Sheet

On the plus side, Zoom Video had $5.5 billion in cash on its balance sheet as of July 31.

Amid Covid-19, Zoom morphed into a social phenomenon as making video calls became routine for consumers to keep in touch with family and friends. Remote learning and needs in telemedicine also boosted demand for Zoom Video’s cloud-based services.

The free use of Zoom for K-12 schools stopped on June 30. Some schools could upgrade to paid versions, said a UBS report.

In addition, demand for Zoom videoconferencing software surged as businesses told employees to work from home. Revenue growth for Zoom stock has slowed as in-person meetings resume and workers return to offices.

As the coronavirus crisis eases, retaining small businesses as well as corporate accounts will be one key to Zoom’s success. 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.

Five9 Acquisition Terminated

In the business market, Zoom rivals include RingCentral (RNG), Cisco Systems (CSCO), Google and others. Zoom faces pricing pressure in the business market as competition intensifies, said a UBS report.

Zoom Video in June said that Greg Tomb will join the company as president. Tomb had been at Alphabet‘s (GOOGL) Google Cloud, where he was most recently vice president of sales for Google Workspace.

Growth in annual recurring revenue for business customers with contracts topping $100,000 is one metric to monitor.

In July 2021, Zoom Video and Five9 (FIVN), which automates call center services, announced a deal to merge. The all-stock deal was originally valued at $14.7 billion. But the companies terminated the agreement on Sept. 30.

Zoom Video aims to be a player in the contact center market with its own products and services. And, artificial intelligence software will likely play a role.

Zoom Stock: Customer Retention Key

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. Zoom software gets high ratings for ease of use and simplicity following earlier video services that provided jerky images and out-of-sync audio.

A “Zoom Meeting” refers to a videoconferencing session hosted on its cloud infrastructure. Paid Zoom business plans cost $15 or $20 per employee and require minimums of 10 or 50 seats.

It’s not clear how much some new product initiatives are contributing to growth.

Zoom Phone, a cloud-calling product rolled out in 2019, lets customers set up group internet phone calls without video. The Zoom Phone replaces traditional business PBX phone systems.

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 later formed San Jose, Calif.-based Zoom Video in 2011.

Zoom Video has built up alliances with the likes of Salesforce.com (CRM), Atlassian (TEAM) and Box (BOX). Salesforce.com invested in Zoom stock prior to its initial public offering and reaped big gains.

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

Zoom Stock Fundamental Analysis

Zoom Video reported October-quarter revenue and earnings that topped estimates amid lowered expectations. But guidance for ZM stock came in below Wall Street’s targets.

The company’s earnings for its fiscal third quarter fell 3% from a year earlier to an adjusted $1.07 per share. Revenue rose 5% to $1.102 billion.

Sales growth slowed for the seventh straight quarter. A year earlier, Zoom earned $1.11 a share on sales of $1.05 billion.

Zoom stock analysts had projected earnings of 83 cents a share on sales of $1.094 billion for the period ended Oct. 31.

In August, Zoom Video lowered guidance for fiscal 2023.

For the current quarter ending in January, Zoom said it expects earnings in a range of 75 cents to 78 cents vs. estimates of 81 cents. The company said it expects revenue in a range of $1.095 billion to $1.105 billion vs. estimates of $1.115 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, but by late June that year, ZM stock consolidated as some analysts questioned Zoom’s lofty valuation.

Then 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.

ZM stock peaked at 588.84 in October 2020. Zoom stock ended 2020 up more than 400%, but them promptly retreated 45% in 2021.

Shares currently own an IBD Relative Strength Rating of only 16 out of a best-possible 99.

Zoom Stock: Is It A Buy Right Now?

Zoom stock holds an IBD Composite Rating of 52 out of a best possible 99. The best growth stocks have a Composite Rating of 90 or better.

In addition, ZM 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.

As of Feb. 24, Zoom stock has no valid entry point. To be actionable, ZM stock needs to form a new base.

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

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