Zoom Video Communications Stock (ZM): Should I Buy It Now?

By Amit Chowdhry ● June 1, 2020
  • Should you buy Zoom Video Communications stock (NASDAQ:ZM) now? Here is some information to help you decide.

The demand for Zoom Video Communications Inc (NASDAQ:ZM) products have surged during the shelter-in-place orders associated with the COVID-19 pandemic. As a result, Zoom Video saw its stock price jump about 164% year-to-date. And the company is preparing to report the first-quarter results for fiscal 2021 after the market close on June 2, 2020.

Zoom management has guided adjusted EPS of $0.10 on revenue of $200 million, according to Fool.com. This guidance was issued on March 4, which was a week before the World Health Organization (WHO) announced the coronavirus epidemic was a pandemic and before any U.S state and many countries started issuing lockdowns.

In the previous quarter, Zoom’s revenue jumped 78% year-over-year to $188.3 million. And net income based on generally accepted accounting principles (GAAP)  was $15.3 million ($0.05 per share) compared to $1.2 million ($0.01 per share) in the year-ago quarter. Based on an adjusted basis, net income was $43.2 million, up $10 million in the year-ago period — which means that the earnings per share jumped 275% to $0.15. Wall Street was expecting adjusted EPS at $0.07 on revenue of $176.6 million.

In April, Zoom was criticized for its lack of certain security measures. This enabled hackers to get into secure videoconferences. And some of the company’s traffic was routed in China.

To counter the security issues, Zoom started working on end-to-end encryption. Currently, Zoom encrypts connections between the company servers and the devices of people who are using the service. Only paid users will have access to end-to-end encryption for their meetings, but all users will use the 256-bit GCM encryption as of May 30 regardless of the license type.

Zoom Video Communications founder and CEO Eric Yuan acknowledged that the company was not prepared to go from 10 million average daily meeting participants in December 2019 to over 300 million every day by April 2020.

Before launching Zoom, Yuan helped developed Webex over 14 years leading up to the $3.5 billion acquisition by Cisco Systems in 2007. And he also worked at Cisco as a Corporate VP of Engineering.

On Friday, Zoom’s stock hit a record and crossed a market value at over $50 billion for the first time. Due to the rapid stock growth, Eric Yuan now has a net worth of $9.3 billion, according to the Bloomberg Billionaires Index.

Should You Buy Zoom Video Communications Inc (NASDAQ: ZM) Now?

Based on the reports I have been reading, 33% of analysts are saying buy, 50% of analysts are saying hold, and 17% are saying sell. In another report, I am seeing that 0 analysts are saying strong buy, 8 are saying buy, 3 are neutral, 1 says sell, and 0 say strong sell.

Case From The Bulls

The bulls are saying Zoom offers a disruptive technology that is designed from the ground up as a video-first collaboration and customer satisfaction is well above video conferencing peers. And both the Zoom user base and the company’s revenue have grown rapidly and are expected to continue to do so over the next several years. Plus Zoom’s low-touch and low-friction model should eventually drive strong margins as the company has already produced a full year of positive GAAP profitability — which ahead of its high-growth software rivals.

Case From The Bears

The bears are saying that the biggest risk facing Zoom is executing across so many different aspects of growth simultaneously as the Zoom Phone is a more complex sale and the company is moving from smaller to larger customers. And Cisco and Microsoft dominate the video conferencing market and they can bundle a broad array of solutions in response to competitive threats from Zoom. And Zoom completed its IPO in April 2019 so it has a limited operating history as a public company to assess.

Disclosure: I own a small number of Zoom Video Communications Inc (NASDAQ: ZM) shares. I wrote this article myself and I do not have any business relationship with any company whose stock I write about. I am not a financial advisor and all articles are my opinion. You should do your own due diligence and consider talking to a financial professional before investing.