Zoom Video Communications stock has lost 85% of its value since peaking above the $500 level in November 2020, at the height of the pandemic.
Two years ago, the videoconferencing company was posting astonishing growth, as most people shifted to working and learning from home. But the reopening of the economy—and intensifying competition from Microsoft (ticker: MSFT) Teams and other rivals—have sent Zoom (ZM) stock spiraling back to Earth. So far in 2022, shares are off 59%.
While some investors might be tempted to bottom fish here, J.P. Morgan analyst Mark Murphy advises against that approach. He resumed coverage of Zoom on Friday with a Neutral rating and an $85 target price; the firm moved to a “not rated” designation in May, but previously had an Overweight rating and $295 target price.
Murphy writes that he is positive on Zoom’s technology, innovation, market position, and “cash-generative financial profile,” but adds that he finds these elements offset by headwinds to near-term growth and margins as the company looks for ways to expand its business into new areas and to address the challenges of a more-competitive environment for its core business.
“Zoom is now pivoting to stabilize a large, but slower-growing revenue base that is generating cash with the need to reinvest” in R&D, sales and marketing as it pushes into new markets, such as chat, contact center, and phone software. And he notes that customer surveys find higher adoption rates for Microsoft Teams eating into Zoom’s business.
He adds that Zoom is fine-tuning its strategy to better target large enterprises, while stabilizing its online segment, which serves individuals and small businesses, but has been acting as a drag on growth. He also says the company is coming up on “a significant” contract-renewal period for enterprise deals signed during the pandemic period. He sees the renewal period as a potential risk as companies reassess spending in a postpandemic environment.
Zoom, which at one point during the heart of the pandemic posted three straight quarters with year-over-year revenue growth of more than 360%, posted 8% revenue growth in the company’s July quarter, and projects 4% growth for its October quarter. For the January 2023 fiscal year, Street consensus estimates call for revenue of $4.4 billion, up 7%.
In Friday trading, Zoom stock is down 1% to $77.59.
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