Zoom's 85% Selloff Has Analysts Calling for a Rally

(Bloomberg) -- The selloff in Zoom Video Communications Inc.'s stock may have gone too far.

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That's the message from Benchmark Co.'s Matthew Harrigan and other analysts, who say the video-conferencing company is well positioned as a hybrid work services provider after riding the stay-at-home boom. And with the stock having cratered almost 85% from its 2020 pandemic peak, wiping out about $135 billion of market value, they see scope for a rally.

"The fixation on Zoom as a Covid pandemic lockdown aberration is exaggerated as global tech and financial firms recognize the permanence of hybrid work," Harrigan said in a note to clients previewing first-quarter results that are due for release after US markets close on Monday.

Most major companies now offer employees the flexibility to work both from the office and from home, though even that has faced challenges due to rising Covid cases in many countries. Apple Inc. this month delayed a plan to require workers to come back to the office three days a week. Credit Suisse Group AG Chief Executive Officer Thomas Gottstein said he doesn't think banks will ever return to working full-time from the office.

All of that bodes well for Zoom, which unlike some pandemic darlings is still showing growth in its key metrics. After a more than 12-fold rise in sales in its last three fiscal years, analysts expect a 12% increase in the first quarter.

Compare that with Netflix Inc., which wasn't able to sustain a massive pull forward in new customers during the pandemic and shocked Wall Street last month with its first decline in subscribers in over a decade.

Analysts like Harrigan think Zoom's product offerings can make it a post-Covid winner as more employees seek flexible work arrangements.

"I think the Street is not filtering through all the tea leaves with Zoom," said Daniel Morgan, senior portfolio manager at Synovus Trust. "They're just kind of stamping it with the stay-at-home Covid trade like Amazon or Netflix and are not really looking at the bigger fundamentals."

Morgan Stanley analyst Meta Marshall says the quarterly report should act as a catalyst to disprove the overly bearish sentiment about Zoom's growth.

"Renewals for contracts signed in the early stages of Covid will have passed for another year in the March/April timeframe, which will provide a better view into enterprise customer retention," Marshall wrote in a note. She has an overweight recommendation on Zoom.

Forecast Upside

Backing up the largely bullish sentiment, analysts forecast that the shares will rise 65% to $143.30 in the next 12 months, according to data compiled by Bloomberg. While that's a far cry from its 2020 closing high of $568.34, it represents a hefty potential return for those purchasing the shares at current depressed levels. Zoom closed at $89.74 on Friday.

Furthermore, the stock's valuation is nowhere near as frothy as it once was. The San Jose, California-based company trades at about 25 times forward earnings, down from 225 times in September 2020.

To be sure, Zoom's growth is slowing as schools restart in person, offices reopen and competition increases from Microsoft Corp.'s Teams software, Salesforce Inc.'s Slack platform and Cisco Systems Inc.'s Webex.

Volatility Expected

Traders are bracing for some volatility after the results, with the stock expected to move more than 21% in either direction -- that's bigger than the moves seen after the past six quarterly reports were issued, according to data compiled by Bloomberg.

Yet overall, there is a feeling of optimism that Zoom is positioned to prosper in a post-pandemic world.

"Even as we shift into a more hybrid working environment, we will need a reliable platform for virtual communication to supplement in-person meetings, and there is a strong sentiment in Zoom's favor already from a user perspective," said Pedro Palandrani, director of research at Global X.

Tech Chart of the Day

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  • Tencent Holdings Ltd.'s billionaire co-founder Pony Ma shared a viral opinion piece on the economic costs of China's strict Covid Zero measures, in a rare show of frustration after his company struggled to grow during the first quarter

  • Didi Global Inc. is widely expected to secure a blessing from shareholders on Monday to delist in New York, capping an 11-month ordeal that wiped out around $60 billion of its market value and turned the ride-hailing giant into a symbol of China's tech crackdown

  • Xiaomi Corp., the world's third-biggest smartphone maker behind Samsung Electronics Co. and Apple Inc., announced a long-term partnership with Leica Camera AG on the co-development of smartphone cameras.

(Updates return potential in paragraph 11.)

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