Zoom Video Communications (NASDAQ: ZM). Zoom, is now synonymous with video calling. However, Zoom was not always flying high. It feels like the world blinked, and then Zoom became a household name. While we all bunkered down, customers and investors began flocking to Zoom in record numbers. COVID-19 ultimately triggered a 200% surge in ZM over six months. Let that sink in. Imagine how many years it would take investing in a diversified mutual fund (what we have been told to do) before you increased your original position by 200%.

Zoom, alongside other technology and healthcare companies, who are pandemic-proof, are providing retail investors with astronomical gains. However, as the FDA expedites numerous COVID-19 treatments, investors must ask themselves, is an industry-wide sell-off coming post-coronavirus?

Today’s Earnings expectations

Today is the big day for Zoom. Today is earnings day. Zoom will post earnings after today’s market close. The past few months of rallying were leading up until this moment. The question on every investor’s mind is that when Zoom lifts the curtain, will we see a huge earnings pile or just a picture of huge earnings. Investors are expecting positive results. Otherwise, they would not have invested.(opinion not advice)

The analysts on Wall Street are forecasting an EPS of $0.09 and $202.48 million in revenue. Zoom’s management expects revenue to come between $199-201 million and an adjusted EPS of $0.10. Investors must understand that management made this earnings guidance back on the 4th of March. Considering the earnings guidance was before ZM’s total users skyrocketed, some analysts might say the expectations are conservative.

In March, the Zoom management was unsure how effectively they could transform a free customer into a paid user. Credit Suisse Analyst Brad Zelnick saw the disproportion between Zoom’s free and paid users as a worrying concern. In turn, Zelnick downgraded his position on Zoom in April. However, the earnings guidance today should indicate whether Zoom was successful at converting free users into paid customers.

Nonetheless, ZM should meet its earnings guidance back in March. (Opinion not advice). Ultimately reassuring some investors of a sound earnings report.

The Bearish argument

Zoom is growing at a rapid pace as the tech company has over 300 million customers. The bears are not disputing the fact that Zoom has some high-paying customers. Because how else would the video-calling company be generating 200+ million in the first place. However, the bears argue that those 300+ million users are mainly free customers. Considering the free version gives users an enjoyable experience, and people’es discretionary income is low, the free-paid disproportion makes sense.

Furthermore, let us not forget Zoom was not a household brand before the pandemic. Competition in the video conference world is fierce. Especially with the likes of Microsoft, Google, and Cisco. When businesses return to normal, and the pandemic subsides, Zoom could be benched as Google, Cisco, and Microsoft dominate the game.

Also, not to mention that Zoom’s growth replicates that of a bubble. (opinion not advice) ZM is at the uncontrolled buying stage (euphoria). All that is needed now is for sellers to arrive in numbers, and the bubble bursts. Overall, the bears hold some weight to their argument.

The Bullish argument

On the other hand, the bulls argue the growth is just picking up. The expiration date of the coronavirus is still uncertain. Meaning Zoom is still gaining a large number of customers. The bullish hypothesis is the more customers equals higher revenue potential.

Additionally, the digital economic disruption will only continue from here. Meaning the need to work from home will only grow from here. Hence Zoom investors are anticipating record highs to be the trend for the foreseeable months.

If a second wave emerged, we could see Zoom’s customer base grow exponentially in days. However, the bulls will likely only charge ahead if Zoom earnings live up to the optimistic expectations.

The polarisation stresses the importance of how significant the earnings report will be for ZM. We could see the Zoom bulls fall of a cliff or be launched into the stratosphere. However, before we finish, remember the root cause of the tech crash of 2001 was extreme optimism on technology stocks.

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick Mcloughlin, Senior Manager of YIG.

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