Zoom Video Communications, Inc. (ZM) quickly became a household name last year thanks to remote working and learning trends adopted amid the COVID-19 pandemic. However, the stock has been quite volatile over the past few months in-part because investors have been weighing the effects of new coronavirus spikes  in some parts of the world versus positive vaccine news. While the stock has delivered 158.2% returns over the past year, it has lost 4.7% year-to-date. The stock is currently trading 45.4% below its 52-week high of $588.84.

This month, a lawmaker from Russia’s ruling party floated the idea of banning ZM after the company reportedly told its distributors to stop selling subscriptions to Russian state institutions.  And according to an outage tracking website Downtector.com, more than one thousand Zoom users were affected in March 2021 when ZM’s video-conferencing platform went  down. Furthermore, because several users are reporting ‘Zoom Fatigue,’ the demand for the company’s products and services could decline significantly as the global economy reopens and people return to their offices. 

Last, many major tech stocks, including  Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL), have grabbed significant market share from ZM by offering similar services.

So, here are the factors that we think could influence ZM’s performance in the coming months:

Several Positive Developments

Last month, ZM entered a new, extensive, multi-year partnership with Formula 1. The partnership consists of multiple touchpoints across the forthcoming 2021 FIA Formula One World Championship racing season and beyond. It also serves as the official unified communications platform of F1. The company also announced new benefits and an expansion to its Master Agent Referral Partner Program in March.

In February, ZM made its Zoom Rooms innovations generally  available.  The innovations are designed to help organizations safely re-enter their offices and sustain an ‘everywhere workforce’.

Slowing Down of Pandemic-Related Expansion

While the work-from-home trend–which was in large measure facilitated by ZM’s platform–became the ‘new normal’ amid the COVID-19 pandemic,  many organizations are keen to  reopen their offices once the pandemic subsides because remote work arguably eliminates spontaneous in-person discussions and creativity, among other negative factors. 

President  Biden  announced recently that all adults in the United States should be eligible to receive the COVID-19 vaccine by April 19, 2021, which is two weeks earlier than his previous target. So, the demand for ZM’s products and services could decline in the near term.

Stretched Valuation

In terms of forward non-GAAP price/earnings ratio, ZM’s 85.67x is 225.1% higher than the industry average 26.35x. In terms of forward P/S ratio, the stock’s 24.74x is 501.9% higher than the industry average  4.11x. Also, the stock’s forward EV/sales of 23.66x is higher than the industry average  4.30x.

POWR Ratings Reflect Uncertainty

ZM has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, ZM has a C grade for Momentum. This is consistent with its 16.5% returns over the past nine months and 7.2% loss over the past month.

The stock has a C grade for Sentiment also. This is justified because  out of the 29 Wall Street analysts that have rated the stock, 13 rated it Hold.

ZM has a D grade for Value, in sync with its much higher-than-industry valuation ratios.

Click here to see ZM’s ratings for Stability, Growth, and Quality as well.

ZM is ranked #41 of 77 stocks in the Technology – Services industry.

Better than ZM: Click here to access 24 top-rated stocks in the same industry.

Bottom Line

‘Zoom’ became a verb last year but its popularity and demand for its services could decline as the economy reopens and several pandemic-related restrictions are gradually lifted. Several users have also complained about privacy and security concerns related to the service. So, unless ZM  announces a major development or addition to its current  revenue-generation stream, we think it makes little sense to buy the stock now at its current valuation.

ZM shares were trading at $334.62 per share on Tuesday morning, up $13.11 (+4.08%). Year-to-date, ZM has declined -0.80%, versus a 10.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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