Zoom Video (ZM): The Bull Case Is Cracked, Not Broken

Zoom Video Communications (ZM, $290.86) is the latest work-from-home stock to come up against difficult comparisons versus last year's torrid pandemic-fueled growth. But most Wall Street analysts – and at least one noted bull – continue to bang the drum for ZM stock.

Argus Research, for one, maintained its Buy rating on shares following the company's steep post-quarterly-results selloff. And no less a market luminary than ARK Invest CEO Cathie Wood – manager of some of 2020's best exchange-traded funds (ETFs) – deployed $57 million to buy the Zoom dip.

ZM stock is still off about 15% since spooking the market with high churn in its segment serving small- and medium-sized businesses. Management and analysts alike expect that revenue headwind to persist for several quarters -- an outlook that could weigh on the stock for some time.

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The Analysts' Take on ZM Stock

Stifel analyst Tom Roderick sums up the Hold case on Zoom: "Year-over-year compares remain as tricky as ever, and the 'Online' business – best represented by customers with fewer than 10 employees – seems to have temporarily peaked."

Over at Needham, analyst Ryan Koontz chimes in with much the same sentiment.

"We maintain our Hold rating on increasing churn and slowing growth, as we seek greater confidence in post-pandemic and new product trends," Koontz writes in a note to clients.

But Argus Research's Joseph Bonner says Zoom's reversion to a more normalized growth rate is hardly a surprise and doesn't change the long-term bull case on ZM stock.

"Zoom made significant gains in its installed base over the last year that should provide a long term benefit whether or not some smaller customers churn in 'coming quarters,'" says Bonner, who rates shares at Buy. "Zoom also demonstrated strong growth in its enterprise business, which the market seems to have overlooked."

The central question for Zoom is whether the pandemic created a secular change in which employees continue to work from home at least part-time -- or whether they are forced to return to their offices en masse, the analyst says.

True, ZM can't influence secular demand for its communication services, but it can tilt things in its favor, Bonner notes. To that end, it's rolling out product extensions, such as Zoom Phone Appliance. Additionally, it aims to become a more broad-based communications platform by enabling third-party developers to create a new applications ecosystem.

"Although the company is competing against some large industry incumbents, it may have just the right mix of innovative technology and strong customer service to take share from these larger competitors," Bonner adds.

Cathie Wood Buys the Dip in Zoom

As much as Zoom bulls might take comfort in Argus Research's take, nothing walks the walk like capital.

That's where ARK Invest's Wood comes in.

The CEO responded to Zoom stock's initial 17% plunge by purchasing roughly 200,000 shares for ARK's flagship ETFs. The ARK Innovation ETF (ARKK) picked up 157,233 shares worth roughly $45.5 million, while ARK Next Generation Internet ETF (ARKW) purchased 36,847 shares for about $11 million.

Back on Wall Street, analysts skew more toward Wood's view of Zoom – albeit with a considerable amount of dissent.

Of the 25 analysts covering ZM tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy, three say Buy, 10 have it at Hold and one calls it a Strong Sell. That works out to a consensus recommendation of Buy, but with middling-to-low conviction.

Analysts project Zoom to generate average annual earnings per share growth of 13.8% over the next three to five years. But overall, they see plenty of run left in ZM stock; their average 12-month price target of $372.05 gives shares implied upside of about 28% from current levels.