San Diego, Calif.-based video communication platform operator Zoom Video Communications, Inc. (ZM) has introduced several new products and services over the past few months. Its shares surged in December 2021 just as Citic Securities analyst Junyun Chen initiated coverage with a Buy rating and a $260 price target.

But the stock has declined 39.1% in price over the past three months and 12.2% over the past month to close yesterday’s trading session at $162.10, after hitting its 52-week low of $162.The success of COVID-19 vaccination programs has been putting pressure on stay-at-home stocks such as ZM, as social distancing mandates are removed.

The company faces intense competition from Microsoft Corporation’s (MSFT) Teams and Cisco Systems, Inc.’s (CSCO) Webex. And in December, its CEO, Eric S. Yuan, sold 96,154 shares, and its CFO, Kelly Steckelberg, sold 6,700 shares. Also, lately, hedge funds' interest in the stock has declined. So, ZM’s near-term prospects look uncertain.

Here are the factors that could shape ZM’s performance in the upcoming months:

Positive Developments

ZM announced on January 10 that Zoom Meeting Client version 5.6.6 had become the first video communications client to attain certification for Common Criteria Evaluation Assurance Level 2, issued by the German Federal Office for Information Security (BSI). In December 2021, the company acquired certain assets from Liminal. Also, it introduced a host of updates to its suite of products in November 2021, including Zoom Meetings, Phone, Events, and added a new feature to download Zoom client updates automatically.

Solid Financials

For its fiscal third quarter, ended Oct. 31, 2021, ZM’s revenue increased 35.2% year-over-year to $1.05 billion. The company’s non-GAAP income from operations came in at $411.28 million, up 41.4% year-over-year. Its non-GAAP net income increased 13.9% year-over-year to $338.38 million, while its non-GAAP EPS was  $1.11, representing a 12.1% year-over-year rise.

Ongoing Investigation

Law firm Brundidge & Stanger P.C. announced on Dec. 21, 2021, that it had commenced a patent infringement complaint against ZM on Nov. 9, 2021, for alleged infringement of its client Cyph, Inc.'s patents and inventions. In July 2021, several law firms launched investigations against the proposed merger between ZM and Five9, Inc. (FIVN). Consequently, ZM and FIVN terminated the merger agreement on Sept. 30, 2021, because FIVN did not obtain the requisite stockholder support.

Stretched Valuation

In terms of forward non-GAAP P/E, ZM’s 35.02x is 43.4% higher than the 24.42x industry average. The stock’s 3.37x forward non-GAAPPEG is 101.9% higher than the 1.67x industry average. Also, its 11.54x, 28.61x, and 12.46x respective forward EV/S, EV/EBITDA, and P/Sare higher than the 4.11x and 16.31x and 3.99x industry averages.

POWR Ratings Reflect Uncertain Near-Term Prospects

ZM has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. ZM has a C grade for Value, which is in sync with its higher-than-industry valuation ratios.

The stock has a C grade for Growth, which is consistent with analysts’ expectation that its EPS will decrease 13.9% for the quarter ending Jan. 31, 2022, and 22% for the quarter ending April 30, 2022.

ZM has a C grade for Momentum, which is in sync with its 57.2% loss over the past six months and 12.2% decline over the past month.

ZM is ranked #42of 78 stocks in the Technology – Services industry. In addition to the POWR Rating grades I have just highlighted, we have also rated the stock for Stability, Sentiment, and Quality. Click here to get all ZM’s ratings.

Bottom Line

ZM’s share prices skyrocketed in its fiscal year 2020 amid the COVID-19 pandemic and hit a peak of $565.45. However, the stock is currently trading below its 50-day and 200-day moving averages of $211.13 and $296.68, respectively, indicating a downtrend. Furthermore, it could keep declining in the near term, with intense competition from other top players. So, we think it could be wise to wait before scooping up its shares.

How Does Zoom Video Communications (ZM) Stack Up Against its Peers?

While ZM has an overall POWR Rating of C, one might want to consider investing in Technology - Services stocks having an A (Strong Buy) rating: NetScout Systems, Inc. (NTCT) and Celestica Inc. (CLS).

ZM shares fell $0.85 (-0.52%) in premarket trading Friday. Year-to-date, ZM has declined -11.86%, versus a -2.20% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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