Just How Real Is Zoom’s Recovery Potential?

Having once been the poster child for stocks that benefited from the pandemic, shares of Zoom Video Communications Inc NASDAQ: ZM have since experienced a hero-to-zero transformation that has few parallels. As recently as the start of this month, they were trading $0.50 higher than their all-time low from April 2019. That was the same month they IPO’d, and who among us could have foretold just what a wild ride they’d take investors on in the years since? 

The San Jose headquartered communications tech company has been there and got the t-shirt. There’s been a 900% rally, matched in its ferocity only by the subsequent 90% drop. And while you’d be forgiven for wanting to avoid Zoom shares with a bargepole, we’re here to tell you there’s quite a lot to like about them right now.

MarketBeat’s Forecast tool suggests there’s at least 25% upside to be had in the medium term, and there are more than a few reasons to think there’s a lot more waiting beyond that. So let’s jump in and see just how real this recovery story might be getting. 

Great Expectations

For starters, the company released much anticipated Q1 results last night after the bell rang to end Monday’s session. There was a healthy beat registered on both the topline revenue and bottom-line EPS figures versus what analysts had been expecting, with the former showing year-on-year growth of 4% and the latter being printed in very much black ink. Beyond the headline figures, there was plenty to note, not least the 13% year-on-year growth seen in their enterprise revenue or the 23% increase in the number of customers paying more than $100,000 a year. 

In line with what we’ve seen in other earnings reports recently, management’s forward guidance for the coming quarters was also hot. Investors love to see this and it lends itself to a great recovery story. For Q2, they’re now expecting revenue to come in between $1.11 billion and $1.115, which compares favorably to the previously forecasted $1.11 billion flat. Looking further ahead, revenue for 2024 is also expected to come in beyond what analysts had been expecting. It’s perhaps no surprise that shares had been rallying into the release as investors were starting to sense that an upside surprise of this magnitude was on the cards. 

Zoom’s shares have popped almost 20% since the start of the month, and while they have a ways to go yet before they’ve conclusively broken their multi-month downtrend, this is as good a start as you could have asked for. Given the beat on Q1’s numbers and the improved outlook, the stock is going through a price revision which almost certainly has to be to the north. Given the beatdown shares have experienced in the past two years, which has effectively put them back at their IPO price from four years ago, it would have had to have been a truly awful report to send them down to fresh lows from here. 

Getting Involved 

Beyond the improving fundamental numbers outlook, investors getting involved will also appreciate the strategic nimbleness of leadership working hard to turn things around. For example, the recent acquisition of Irish-based Workvivo points towards Zoom’s ongoing pivot away from simply being an online video communications tool. Their revenue is up, churn is down, the outlook is blossoming, and the company is boasting its strongest cash flow numbers for a while. If ever the time was ripe for a recovery rally to begin in earnest, it’s now. 

In terms of getting involved now, it makes sense to wait for shares to break further into the $70s. This would put the downward trend under enough pressure that it could break quite easily and, in doing so, open up the path back to triple-digit prices before the leaves start to turn.