Troubling Times Ahead for Zoom in the Post-Pandemic World

Stocks to sell

Zoom Video Communications (NASDAQ:ZM) was one of the prime beneficiaries of the coronavirus pandemic. It closed out 2020 with a colossal run rate of $3.5 million in revenues. However, judging from recent results, its top- and bottom-line growth are slowing as we inch closer to a post-pandemic reality. Moreover, ZM stock is incredibly overvalued based on its challenging outlook.

A woman sitting at a desk waves at a large number of people on the videoconferencing software Zoom (ZM).

Source: Girts Ragelis / Shutterstock.com

ZM stock caught fire last year, with shares gaining nearly 400%. However, the opposite has transpired this year, as shares have lost more than 20% of their value so far in 2021. Nevertheless, ZM stock trades close to a whopping 20 times forward sales.

With the slowdown in pandemic-induced tailwinds, such a massive valuation is unjustified.  Moreover, the skepticism surrounding Zoom’s ability to maintain its business levels in the post-pandemic world is growing.

Zoom’s Troubling Outlook

The sales cycle is likely to normalize for Zoom as customers’ urgency to purchase its services wanes. With the lifting of lockdown restrictions and the majority of the population vaccinated, things are starting to get back to normal, including the return of in-person meetings. Moreover, customers now have plenty of time to conduct a cost-benefit analysis to determine which video conferencing service suits them best.

Zoom announced its fiscal second-quarter results in late August. Revenue shot up 54% from the prior-year period to $1.02 billion. However, it was nowhere close to the triple-digit growth the company was experiencing at the height of the pandemic. Zoom also reported slowing growth in net income, cash flow from operations and free cash flow.

Management said fiscal third-quarter revenue is likely to come in between $1.015 billion and $1.02 billion, meaning they do not expect any sequential sales growth. What’s even more concerning, though, is that adjusted earnings are forecast to be $1.07 to $1.08 per share, compared to $1.36 per share in the second quarter.

Zoom will be looking to win over larger enterprise customers in the coming quarters. However, doing so will require effort with a hefty increase in advertising and marketing spending, thus raising the firm’s costs and potentially hurting its bottom line.

The Five9 Deal Debacle

In addition to slowing growth, Zoom shareholders are contending with the termination of the much-talked-about deal between the company and cloud call-center software provider Five9 (NASDAQ:FIVN), which was canceled last month.

The deal was pretty much doomed from the get-go. On July 18, Zoom said it would acquire Five9 for $14.7 billion in stock. On that day, shares of Five9 were trading near $178 and ZM stock was trading near $362. Per the terms of the deal, Five9 stockholders were supposed to get 0.5533 shares of ZM stock for every Five9 share they owned, putting Five9’s value at $200.28 a share, according to CNBC.

Shortly after the announcement, ZM stock began to fall. By the time the deal was called off, shares were down around 30%, while Five9 shares had dropped about 11%. This meant the deal was even less attractive for Five9 shareholders, who unsurprisingly voted the deal down.

Though Five9 hasn’t experienced the same level of growth as Zoom, it is poised for big gains due to healthy demand for contact center as a service, or CCaaS. Zoom, on the other hand, is experiencing slowing growth. And despite shares losing nearly a third of their value in the past few months, they are still trading at close to 20 times forward sales.

The Bottom Line on ZM Stock

Zoom has a big test ahead as it looks to rediscover itself in the post-pandemic world. Forecasts show the company is headed for a significant slowdown in revenue and earnings growth, yet shares still trade at a lofty valuation.

At present, ZM stock is a highly unattractive investment.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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