Shares in Zoom Video Communications (NASDAQ: ZOOM) – which had a monster run during the pandemic – are underperforming right now. Last week, Zoom’s share price was hovering between $250-$265. Today, however, it’s under $210.
So why has Zoom’s share price crashed? And has the fall provided a buying opportunity for me?
Why Zoom’s share price has tanked
The main reason Zoom stock has experienced a big decline this week is that the market was unimpressed with the group’s third-quarter 2021 results, posted Monday night.
In my view, the results weren’t terrible. For starters, revenue came in at $1.05bn, up 35% year-on-year, and ahead of Wall Street’s estimate of $1.02bn. Meanwhile, earnings per share amounted to $1.11 versus the consensus forecast of $1.09. The company also raised its full-year revenue guidance, albeit slightly.
However, there were a few things in the Q3 results the market didn’t like. One was the fact that Zoom’s addition of new customers with over 10 employees grew at just 18% – below pre-pandemic levels.
Another issue was guidance. Here, Zoom told investors it expects flat revenue for Q4 compared to Q3, along with a small decline in earnings.
It’s worth noting that on the back of these results, a number of brokers cut their share price targets for the stock. Bank of America, for example, went from $385 to $270. Evercore, meanwhile, went from $255 to $235.
“For now, investors will need some patience as we do not see any upcoming catalysts that would change the sentiment on the stock,” wrote Evercore’s analysts in a research note.
Should I buy Zoom stock now?
I use Zoom’s video conferencing software quite regularly and I think it’s pretty good. However, looking at Zoom from an investment point of view, I have a few concerns.
The first is in relation to the valuation. After the recent share price fall, Zoom still has a market capitalisation of around $61bn. That means the forward-looking price-to-sales ratio here is still around 15. That’s relatively high and doesn’t leave a huge margin of safety, in my view. If future growth is disappointing, the stock could fall further.
Speaking of growth, this is another issue for me. There’s no doubt that growth has been excellent throughout the pandemic. But it’s hard to know what it will look like after Covid-19 when the world gets back to normal. To my mind, there’s a fair bit of uncertainty here.
Finally, I’ve always had concerns about the level of competition here. Is there anything to stop rivals such as Microsoft (which is a massive player in the business productivity solutions space), Google, or Amazon stealing market share in the future? I’m not convinced there is.
Given these concerns, I’m going to leave Zoom on my watchlist for now. All things considered, I think there are better growth stocks I could buy today.
