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The Zoom share price just crashed 15%! Is it a buy now?

Worker on sofa and team on laptop screen talking and discussion in video conference and dog interruption.
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The Zoom (NASDAQ: ZM) share price crashed almost 15% on Tuesday. But since the beginning of 2020, the share price is still up a huge 200%. It’s a company that’s been able to fully capitalise on the pandemic as a work-from-home culture developed. 

Even so, I need to understand why the stock just crashed before I buy. Let’s take a closer look.

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Zoom earnings

I’m sure most people know Zoom nowadays. It became ubiquitous during the pandemic as workers were hosting remote meetings over its video calling platform. Like Alphabet‘s Google before it, the firm enjoyed the accolade of its name becoming almost the generic term for its key activity.

Well, the company released its third-quarter results on 22 November that showed revenue grew 35% to $1bn. Adjusted operating margin was an excellent 39% too. All sounds okay so far, and makes me think Zoom is showing signs of being a durable, quality business.

But the problem with Zoom is that it’s benefited hugely from the pandemic. So, as people have been returning to offices, growth today won’t be as impressive as this time last year. Zoom guided for fourth quarter revenue of $1bn, which is a 19% growth rate over last year. This is a big slowdown from the third-quarter growth rate of 35%.

In fact, revenue growth was as high as 300% as recently in Q1 this year. This is a worrying trend of declines.

Analysts slash Zoom share price target

After the earnings release, a number of analysts cut the target price for Zoom. Deutsche Bank lowered its Zoom share price target to $280 from $350, saying the decelerating growth is tough to like.

On the whole, though, analysts remain bullish. The aggregate share price target is $347, which is a huge 68% higher than the closing price on Tuesday. However, the revenue growth forecast for 2023 is about 18%, so I’d have to be content with this lower rate if I decided to buy the shares.

Should I buy?

I view Zoom favourably as a user of its video platform. As mentioned, almost becoming a verb in working environments (“I’ll Zoom you later”), is a rare thing and strengthens the brand.

I also think the economics are excellent as it achieves such high operating margins. Cash generation is impressive too.

But I do share the concerns of the analysts that have downgraded the share price. Zoom has been a huge gainer from the pandemic, so my thinking is that its big growth phase is over. The stock is still valued on a price-to-earnings ratio of 43. I consider this high for a company that has decelerating growth, and its best period may be over.

I also have concerns over valuations in the US right now. So there’s a risk that the Zoom share price falls on general market weakness.

For now, I’m going to keep the stock on my watchlist to see if it can accelerate growth again.

But this stock could be worth a look...

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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Zoom Video Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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