Zoom (ZM)stock: pandemic darling faces a bleak future

Zoom Communications (NASDAQ: ZM) stock price has gone through a prolonged turbulence in the past few years. After surging to $588 during the pandemic, it has dropped to $64, bringing its market cap to $19 billion from a peak of $182 billion.

Zoom Communications earnings ahead

Zoom, a company whose name became a verb, has fallen from grace as demand for virtual meetings faded and as competition from Cisco, Microsoft, and Google increased. As a result, its revenue growth and profits have stalled. Annual revenue rose to $4.5 billion in 2023 from $4.3 billion in 2022 after rising from $622 million in 2020 to $2.6 billion.

Zoom is in a difficult place since its key product is also provided by companies with a strong market share in other areas. Google Meet is incorporated in Google’s suite of products while Microsoft Teams has long been bundled with its 365 product. 

Therefore, it has become difficult for Zoom to grow its market share in a time when many companies are looking at cost efficiencies. Most importantly, it will be difficult for the company to increase prices since many companies will opt to use its alternatives.

Zoom has sought to solve this problem by expanding its service offerings. It launched Zoom Docs, a platform that resembles Google Docs but one that is only available in Zoom’s ecosystem. It has also launched Whiteboard, Clips, and Notes solutions, products that face intense competition.

Analysts have low expectations about Zoom when it publishes its financial results on Monday. The average estimate among analysts is that its revenue rose by 1.90% to $1.13 billion in the first quarter. It had generated $1.1 billion a year earlier. For the year, analysts expect that its total revenue will rise to $4.61 billion from $4.53 billion a year earlier. 

Therefore, with Zoom, we have a well-known brand that is seeing tepid growth and significant competition. It has also become a bit overvalued. For SAAS companies, one of the best valuation concepts is the rule of 40, which looks at growth and profitability.

In Zoom’s case, its forward revenue growth stands at 3% while its net income and EBITDA margin sits at 14 and 15.5, respectively. The result is that its rule of 40 metric stands at less than 20, meaning that the company is overvalued. It also has a trailing and forward PE ratios of 31 and 33, which are higher than the faster-growing S&P 500 index.

Zoom stock price forecast

ZM chart by TradingView

Turning to the weekly chart, we see that the ZM share price has been in a tight range since October 2022. It has found substantial support at $58.3, where it has failed to move below since that period, which explains why the Average True Range (ATR) has tumbled. The stock has also remained at the 50-week moving average.

On the positive side, this performance could be part of the accumulation phase of the Wyckoff Method, which could lead to more upside in the near term. If this happens, the stock could surge to the key resistance at $85.50, it highest point in January 2023.

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