Should Investors Buy Or Sell Zoom Stock Before The Earnings Release?
Tech stocks continued to gain ground on Monday, lifted by optimism that the coronavirus-induced lockdowns will continue to be lifted and stop weighing down on economic recovery. The Nasdaq Composite went up by 0.66% on Monday’s closing. Among other stocks, Zoom Video Communications (ZM Stock Report) stood out, climbing by nearly 14%. That might simply be due to the security update over the weekend. Another factor to consider is the recent addition of Zoom to the MSCI World Index. With a number of ETFs tracking the index, we could see more capital flowing into the ZM stock. This could help to drive the share price further.
New Security Update A Boost To ZM Stock?
One of the major issues that have been deterring investors from Zoom is its falsely claimed end-to-end encryption on its platform. The claim wasn’t true because its own employees could still access the video streams. This is now history as users would have 256-bit GCM encryption regardless as of May 30.
The new upgrades will provide stronger encryption for video calls to its paying customers. Many analysts argued such moves could drive free users to upgrade their accounts. That, in turn, could potentially help Zoom to convert millions of active participants to paid users. The increase in conversion could be a key driver in monetizing the business to ensure sustainable growth. If things go as planned, ZM stock would be an absolute gem for investors even after the coronavirus pandemic.
While it is definitely great news for investors, limiting the stronger security to paid customers was met with mixed reactions from the end users. But hey, there is no free lunch. Unlike other tech giants which can easily subsidize their video call services, Zoom is probably in a bigger need to differentiate its paid and free services.
In April, the company stated that it had topped 300 million ‘daily meeting participants’. This is 20 times more than its record at the end of last year. This came after much of the global workforce began working from home since the coronavirus outbreak. While originally intended for business users, many are even using Zoom for social purposes. There must be good reasons why users are preferring it to services from other bigger rivals. The only pity is that social users are less likely to be paying customers, reducing the potential upside.
Zoom Is The Market Leader In Video Conferencing, Will That Last?
There have been ongoing headlines on what the world would look like in the post-COVID-19 era. My bet is, we will see a major shift in the habits of the population. Technology will play a more important role in every aspect of our life. Companies like Facebook (FB Stock Report) have started this initiative, making most of its open roles in the US available for remote recruiting and hiring. It is also allowing many of its global employees to request a switch to remote work. Could this be due to the higher productivity observed during the lockdown period? That is certainly a possibility. Or perhaps such arrangements reduce the need for big offices, helping to cut costs for companies.
Despite having a head start in the video conferencing market, Zoom may find it increasingly difficult to compete with larger players with deeper pockets competing in this market. After all, larger rivals are able to bundle their products and services, offering corporate clients better-integrated solutions. In such a case, the allure of Zoom as a standalone video conferencing player may diminish. Currently, Zoom has an enterprise value of about $37 billion. But it’s brand recognition and growing user base could still make it a lucrative takeover target for tech giants like Cisco (CSCO Stock Report), Facebook, and Alphabet (GOOGL Stock Report).
What Are Analysts Saying About Zoom?
Shares of Zoom Communications have gone up nearly 200% year to date and are currently trading at $204.15. Many analysts are concerned with its valuation, stating that it is too high relative to its growth. Zoom might seem like a safe haven in a coronavirus stock market. But many experts say it’s overbought and overrated. As a result, Zoom might rally higher in the near term, but its long term performance over larger players remains a question to be answered. Alternatively, the ZM stock could cool off to a more reasonable level after reporting its fiscal results later this evening. The question is, should you buy Zoom now, or after the earnings? Let us know what you think in the comments section.