Zoom Stock Has Peaked - Here's Why (ZM)

If a stock is pretty much flat in terms of performance over the past two months, while the broader equity market as a whole has undergone an eye-watering powerful recovery, investors will be asking the uncomfortable questions. That’s the situation that Zoom Communications (NASDAQ: ZM) finds itself in as the coronavirus pandemic continues to retreat in the face of economies reopening and restrictions being scaled back.

It burst on the scene in early February as the must-have new technology application for companies adjusting to their workforces working from home. If no one is going to be in the office, group conference video calls become the name of the game to keep communication lines open. From January through its April high, shares rallied 170% as demand and speculation surged. Other office communication tools like Slack (NYSE: WORK) also caught strong bids and even the similarly named but in no way related penny stock Zoom Technologies (OTC: ZOOM) went through the roof in the hysteria.

Zoom’s rise to the headlines wasn’t without controversy however. It became apparent pretty quickly that there were major privacy concerns and it was temporarily banned in New York schools. Earlier this month, the company acquired security startup Keybase to shore up its security practices and this seems to have assuaged many. There were some pretty savage pullbacks too during the rally, with a mixture of profit-taking, security concerns, and fears of a bubble all helping to sink shares by 30% in less than 10 days, twice.

And even though shares were within 2% of all-time highs last week, it feels like broader market forces have started to turn against them and that they might have had their day in the sun.

Every Other Stock is Rallying

During Tuesday’s session, the S&P 500 index broke through its range of the past month to set a new post-crash high. The other major indices are following suit and the VIX, Wall Street’s ‘fear gauge’, is close to post-crash lows. There’s a couple of things driving this optimism. European countries like Italy and Spain where the virus hit hardest are starting to roll back restrictions, new cases and deaths have been plummeting after spending weeks upon weeks just ramping and states are starting to reopen their economies, or are at least targeting a date to do so.

There’s a risk that Zoom shares will trade like the VIX over the coming weeks and if optimism increases and the S&P 500 keeps rallying, no one is going to be getting involved with Zoom at its current valuation. Consider this, with a new market cap of close to $50 billion, Zoom is worth more than every publicly traded airline, combined. This kind of thing makes for frothy reading and unless the company’s earnings absolutely crush the already high expectations analysts have, it will be a fast and furious ride back down to earth.

It’s unlikely that shares will retrace right back to pre-coronavirus levels, as social distancing measures are set to continue for many months yet and companies like Facebook and Twitter have said their employees can continue to work from home indefinitely. But Zoom isn’t the only player in the game at this point.

Stiff Competition

Microsoft’s (NASDAQ: MSFT) Teams application already had a foothold in the teleconference space and they’re working aggressively to maintain and build on that. Considering how many companies around the world use Microsoft Word, their Team product will be a logical and easy addition for many. Google’s (NASDAQ: GOOGL) Meet (formerly Hangouts) app is also gaining ground in the space. When you consider the arsenal of resources and experience that each of these tech giants are carrying into the teleconferencing space (which is only a portion of their business), it’s not hard to see why Zoom investors might be getting nervous. Their teleconferencing app is the be-all and end-all of their revenue model. If other providers can match or beat it’s performance or price as demand and panic simultaneously drop too, then they’re in real trouble. 

Technical traders will note that Zoom’s MACD has just had a negative crossover on the daily chart and shares are trading down 3% in pre-market trading. If they finish down on Wednesday, that will be the fourth consecutive down day - something that they haven’t had since October 2019. Buyer beware.