Zoom Video Communications (NASDAQ: ZM) is now the poster boy for working at home, socialising during the pandemic, and the bullish technology market. Zoom earnings are just around the corner, 31st August, which is causing share price expectations to polarise. While Wall Street expects Zoom to post another blowout earnings report, Zoom’s future remains unclear. Especially, as valuations become extreme and the coronavirus expiration date remains uncertain. Today’s article will breakdown Zoom’s Q2 earnings expectations and whether the future is bleak or bright for the rising videoconferencing star.
Table of contents 1. Zoom must hit consensus estimates to maintain bullish momentum. 2. Does YIG see value in investing in Zoom post-earnings?
Why is Wall Street bullish about Zoom’s earnings?
Zoom’s astronomical earnings growth was a by-product of the global pandemic. Wall Street instantly rallied behind ZM ahead of previous earnings in 2020. However, the virus’s future, growing competition from Microsoft, Google, and Cisco, and difficulty in sustaining record earnings have left Wall Street weary. Nonetheless the bulls retain royal status.
According to FactSet, analysts expect adjusted earnings of 45 cents a share, which is up 8 cents Year on Year (YoY).Considering, Zoom adjusted their earnings to 44-46 cents a share, it is fair to say ZM and Wall Street are virtually on the same page. Additionally, Estimize, which pools together expectations from hedge-fund-executives, brokers, and buy-side analysts forecasts adjusted earnings per share of 50 cents.
Thus, on the Q2 earnings front, Wall Street is projecting Zoom to post expected or better than expected results. The harmony of Zoom and Wall Street expectations continues with Q2 revenue. Zoom foresee revenue coming in between $495-500 million, which is on par with the average analyst expectation of $500 million. It is important to note that Analyst predicted less than $225 million in revenue before Zoom increased its Q2 earnings guidance in June. Overall, the congruency between Wall Street and ZM has left the videoconferencing stock as a Moderate Buy. The rating is based upon 12 “Buy,” 8 “Hold,” and 2 “Sell” recommendations.
Moreover, the Wall Street price targets sit between a low of $180 and a high of $300. Despite some low price targets, investors gravitate towards the higher end of the range, as ZM traded around the $290 mark last week. The positive perception is also evident in the options market. ZM’s 10-day call/put ratio of 3.32 is 81% higher than it was at the same time last year. Suggesting investors are pricing in a surge on Monday. However, YIG would like to point out that the rising bullish sentiment increases cliff-edge height if ZM fails to post expected or better than expected earnings come Monday.
Does YIG see value in a Zoom earnings investment?
Before I begin, I am obliged to remind our viewers that this is not advice but rather investment commentary from extensive research
Short answer: Investing in ZM earnings is a gamble. Investing in the future of Zoom may put the odds in your favour (opinion, not advice).
Arguably, the biggest question critics have thrown at ZM is will their light burnout or are they becoming an evergreen technology giant? Simplifying that question we could put it as should investors invest based on Zoom’s fundamentals or the hype?
Fundamentals and Zoom’s post earnings future
Zoom financial fundamentals thus far are outstanding. However, creating an impressive track record means investors and shareholders expect nothing less than blowout results. Therefore, if Zoom posts disappointing earnings on Monday after the bell, we should see a big sell-off. Moreover, every good company knows that saturation is the killer of growing fundamentals. Consequently, Zoom is not resting on their videoconferencing locals. Instead, ZM is expanding into the international phone cloud service and home device markets. Wall Street is applauding Zoom’s initiative. For example, William Blair analysts see Zoom’s phone service offering as an exciting component of their expansion. However, some bears argue Microsoft, Google, and Cisco already dominate, and Zoom is just a vacuum for free users and not paying customers.
Overall, Zoom is still a speculative stock. However, if they become the videoconferencing captain and can assert market dominance in the home devices, and then ZM should become a value investment.
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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