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Why Zoom Video Stock Dropped Today

By Evan Niu, CFA – Sep 2, 2020 at 12:49PM

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Zoom shares give back some gains as investors lock in profits.

What happened

Shares of Zoom Video (ZM -1.43%) have dropped today, down by 7% as of 12:22 p.m. EDT, as investors took profits off the table following a massive surge this week. The videoconferencing specialist led a broad rally in enterprise software stocks yesterday after announcing blowout second-quarter results on Monday.

So what

The stock soared 41% on Tuesday after the video-calling tech company reported an astronomical 355% increase in revenue in the fiscal second quarter. Zoom has been among the biggest inadvertent beneficiaries of the COVID-19 pandemic, which has changed how people connect both personally and professionally. Considering the sheer magnitude of the stock's 520% gain year to date, it's not surprising that some investors are selling to lock in those profits.

Man sitting at table with computer using Zoom software to videoconference with 12 people

Image source: Zoom Video.

Now what

It's also worth noting that Zoom's rally so far this year has put the company's valuation into lofty territory, with shares currently trading at 115 times sales and over 250 times forward earnings as the market continues to price in significant growth expectations. Zoom has clearly been delivering impressive growth figures as it starts to grow into that valuation, but high-multiple stocks also tend to be extremely volatile.

Zoom's guidance for the current fiscal year (2021) calls for revenue of $2.37 billion to $2.39 billion, which at the midpoint would be nearly four times the $622.7 million in sales the company reported for fiscal 2020.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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