- Zoom Video Communications is ready to reverse course and trend higher.
- The Q2 results and guidance are favorable and should lead the analyst to raise their targets.
- Institutions have bought in 2023 and put a bottom in the market.
Technicals aside, there are several reasons why Zoom Video Communications (NASDAQ:ZM) is ready to rock into a reversal. The point is that the stock is down more than 87% off its pandemically-driven highs, offering an opportunity that long-term investors may not want to pass up.
With growth on the table, the stock is at a turning point and ready to begin trending higher, the question is when the rally will start. Based on evidence in the analyst and institutional activity, the rally could start sooner rather than later.
#1 - Outperformance In Q2, Guidance Is Favorable
Given the slowdown in work-at-home activity, Zoom Video Communication was not expected to have a robust quarter. Still, it was expected to post a solid quarter relative to last year, and the reality is that the underlying business is stronger than anticipated. The $1.14 billion in net revenue is up 3.6% compared to last year, 4.5% on an FX-neutral basis, and outperformed the Marketbeat.com consensus by 270 basis points. Strength was sustained due to Enterprise-level business offset by weakness in other areas. The Enterprise segment grew by 10.2%, led by a 17.2% increase in clients worth more than $100.00.
Margin news is also good. The company widened its margin significantly at all levels and in GAAP and adjusted comparisons. The key points are adjusted operating margin at 40.5%, operating cash flow up 30.6%, GAAP income up nearly 4X, and adjusted earnings of $1.34, which are up $0.29 compared to last year and $0.28 better than expected. The revenue and earnings strength led the company to raise 2024 guidance above consensus.
#2 - The Valuation Is Reasonable With Growth In The Forecast
Zoom Video Communication stock was once 1 of the highest-valued growth stocks in tech, which is saying something. The sector is not known for reasonable valuations, yet Zoom Infor now trades at what could be considered a very reasonable level. The stock is trading at only 14.5X its F2024 earnings guidance at the low end of the range, and there is an upside risk to this outlook. The high end of the range puts the stock at an even lower valuation, and the odds Zoom will outperform its guidance is high. The company tends to beat consensus figures by a wide margin and has extra incentive to produce efficient results in today’s operating environment.
#3 - The Analysts Indicate A Bottom For Zoom Video
The analysts' activity in Zoom Video has been biased to the downside this year, but there are signs that sentiment is turning a corner. While the first 3 analysts that revised their targets lowered them, their consensus aligns with the broader consensus and predicts about 22% of upside for the market. The takeaway from the chatter is that slowing business appears to be bottoming, and a bounce back is in the works for this “cash cow,” as Bernstein analyst Peter Weed labeled the company. Until then, 21 analysts rate this stock with a consensus of Hold.
#4- There Is An Institutional Bottom In Play For Zoom Video
The institutions only own about 54% of the company, but that figure is growing. The group has bought the stock on balance for 4 quarters, and the total activity ramped to a peak in Q3. Net activity remains net-bullish on a to-date basis in Q3 and is not expected to change now that guidance is in. This activity coincides with a bottom in the market that could provide a launching point for higher prices.
The chart is favorable for a rally; whether 1 will form is the question. The post-release action has been mixed, and shows continued resistance at the 150-day moving average. The EMA is putting pressure on the market and has squeezed it against support. The guidance and sell-side activity suggest a break to the upside, but that is not guaranteed. However, a move above the EMA would be bullish and easily attract new money. In that scenario, the next target for resistance is in the $85 to $90 range.
