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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos – May 31, 2020 at 2:10PM

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Zoom is one of several stocks that could make big moves over the next few trading days.

Stocks jumped last week, as investors celebrated the resumption of more normal activity across big parts of the economy. Both the Dow Jones Industrial Average (^DJI -0.45%) and the S&P 500 (^GSPC -0.09%) gained over 3%, which put the S&P at just a 6% decline so far in 2020, while the Dow is lower by 11%.

A few big-name stocks will announce earnings results over the next few trading days, including Ambarella (AMBA -0.19%), Slack Technologies (WORK), and Zoom Video Communications (ZM 0.82%). Below, we'll take a look at the important trends that might send their stocks moving this week.

An engineer in gloves working on a computer chip

Image source: Getty Images.

Ambarella's market share

Ambarella's Tuesday earnings report should answer some big questions investors have about its business. Sure, the video tech specialist competes in some attractive industry niches like computer vision and AI. But its operating results haven't yet demonstrated a defensible market position in those arenas. Sales declined in two of the last four quarters, and Ambarella's gross profit margin fell to 58% of sales in fiscal 2020 compared to 61% in the prior year. 

CEO Fermi Wang and his team predicted that fiscal 2021 will bring more of the same, with sales rising but profitability staying under pressure while Ambarella widens its portfolio of computer vision chips. That forecast occurred before the pandemic struck key markets like Europe and North America, though, so investors may see significant changes to management's outlook on Tuesday afternoon.

Zoom's user gains

Expectations could hardly be higher for Zoom's earnings report on Tuesday. The digital communication specialist was seeing interest soar in recent months -- and that was before COVID-19 likely sent key engagement figures to record levels. 

Much of that optimism is already reflected in a stock price that has more than doubled since the start of the year. That rally means the pressure is on for CEO Eric Yuan and his team to show continued impressive gains in the user base, but also in operating cash flow and earnings. Big gains in those metrics would give Zoom its best chance at investing heavily in the business and -- ideally -- turning many of its newest visitors into loyal customers over the coming quarters.

Slack's member base

Investors are expecting to hear good news from Slack in its first-quarter earnings report on Thursday. The enterprise communication software specialist was on a roll before the pandemic struck, and its products likely became more important as businesses moved to an entirely off-site work structure.

That optimism has investors who follow the stock predicting 40% sales growth this quarter, with revenue climbing toward $190 million. Slack is still expected to post a net loss, though, as it prioritizes market share in its battle against well-capitalized rivals such as Microsoft.

If the tech company can beat the odds and build a substantial base of users, then its software-as-a-service model should produce high returns for investors over time. The bearish case for the stock, on the other hand, sees rivals slashing prices to win market share and keeping a lid on Slack's earnings potential. Its performance during the COVID-19 pandemic might offer clues as to which scenario investors are most likely to see play out over the next five years.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Microsoft. The Motley Fool owns shares of and recommends Ambarella, Microsoft, Slack Technologies, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
$75.08 (0.82%) $0.61
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,094.33 (-0.45%) $-84.88
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,637.15 (-0.09%) $-3.32
Ambarella, Inc. Stock Quote
Ambarella, Inc.
$57.46 (-0.19%) $0.11
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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