Zoom (ZM) Stock Tanks 15% on Fears of Overvaluation Despite Strong Quarterly Results

UTC by Bhushan Akolkar · 2 min read
Zoom (ZM) Stock Tanks 15% on Fears of Overvaluation Despite Strong Quarterly Results
Photo: Zoom Blog

Zoom Communications has registered a phenomenal growth rate for the fiscal third-quarter reporting a net income of $198 and $777 revenue. Analysts have mixed views over the 12-month target for ZM stock.

On Tuesday, shares of Zoom Video Communications Inc (NASDAQ: ZM) tanked 15% despite the company reporting its most impressive quarterly performance. Investors dumped Zoom (ZM) stock on fears of overvaluation.

ZM stock had a massive run so far in 2020 as Zoom became popular as the ‘work-from-home’ stock during the coronavirus pandemic lockdown. As businesses had to close offices during the lockdown, the demand for Zoom shot-up significantly. The company acquired a huge number of customers during the pandemic.

Even after Tuesday’s correction, ZM stock is trading at nearly 500% premium year-to-date. Zoom’s quarterly calendar remains a bit off the track from traditional calendars. Zoom Communications reported its fiscal third quarter for the period between August-October. The company reported a massive $777 million revenue registering a 367% surge year-over-year. A massive growth rate allowed Zoom to report a net income of $198 million against $2 million in the same quarter last year.

For the upcoming fiscal fourth quarter, Zoom Communications has issued guidance with revenue of $806 million to $811 million. During Monday’s earnings call, Zoom CFO Kelly Steckelberg responded to a question on the company’s growth outlook once the vaccine is out and offices and schools resume normal functioning in 2021. Kelly Steckelberg said:

“While we all hope for a vaccine as soon as possible, I think that remote work trends are here to stay. Features and products rolled out by Zoom in recent months will “support customers and employees that are thinking about potentially going back to work likely in some sort of a hybrid work environment.”

Businesses will continue to provide flexibility to employees of working from home.

Zoom (ZM) Stock Price Remains Overvalued

While Zoom Communications has surely registered a phenomenal growth rate in 2020, analysts say that its stock price is largely overvalued. In a note to clients, Dan Romanoff of Morningstar wrote:

“We continue to struggle with Zoom’s valuation and view shares as overvalued.”

On the other hand, Credit Suisse has also maintained an “underperform” rating on the Zoom stock. However, it still puts a 12-month price target between $513-$340 on the heels of blockbuster earnings. ZM stock has already corrected 25% from its 2020-high above $550. As per Credit Suisse, the stock can further correct another 25% in the next 12 months.

JPMorgan, however, remains optimistic on Zoom upping its 12-month price target to $450 from the previous $425.

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