Please ensure Javascript is enabled for purposes of website accessibility

Why Zoom Video Communications Stock Was Up 28% in August

By Jon Quast – Sep 3, 2020 at 3:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors piled into the stock, anticipating a cool post-earnings pop. They weren't disappointed.

What happened

Shares of Zoom Video Communications (ZM 2.19%) were up 28% in August, according to data provided by S&P Global Market Intelligence. The stock's outsized gains didn't get started until later in the month when analysts began predicting blow-out results for the company's upcoming second-quarter earnings report. Investors began bidding up the stock in anticipation.

Zoom reported earnings on Aug. 31, and calling it a blow-out quarter would be an understatement. A Bank of America analyst had one word to sum it up: "unprecedented."

ZM Chart

ZM data by YCharts.

So what

Multiple analysts issued bullish statements on Zoom stock in August. For example, RBC raised its Zoom price target by 20% to $300 per share. And Rosenblatt Securities raised its price target by 24% to $260 per share. All analysts expected incredible revenue growth from the company -- consensus estimates placed Zoom's Q2 revenue at around $500 million. In the days leading up to report, investors started piling in, hoping to see some sort of pop after earnings.

I think, by now, you know the rest. Zoom stock rocketed around 40% higher to new all-time highs after its Q2 report. Its results obliterated even the most bullish expectations. The company reported revenue of $664 million, an increase of 355% year over year. Its net cash from operations was $401 million -- up almost 13 times from the year-ago quarter.

A businessman rides a rocket ship expelling cash exhaust over a multicolored bar chart.

Image source: Getty Images.

Now what

Zoom issued guidance for its fiscal 2021 (its current year). The company expects full-year revenue of $2.37 billion to $2.39 billion, and non-GAAP (adjusted) diluted earnings per share of $2.40 to $2.47. Given its current market capitalization of around $110 billion, that means Zoom stock currently trades around 46 times fiscal 2021 sales and around 164 times non-GAAP earnings. That's a hefty price to pay, even for a growth stock of Zoom's caliber. 

The debate isn't whether Zoom can grow in the near term -- investors are divided about whether Zoom can grow at a rate to justify its valuation over the long term. Furthermore, some believe Zoom's videoconferencing tool is merely being used now out of necessity, but customers will bail once COVID-19 is far in the rearview mirror.

This is a good time for Zoom bulls to review their investing theses, given the stock's current valuation, to see if they are prepared to continue holding for the long term. Likewise, Zoom bears should consider that top companies often find ways to keep growing and winning -- sometimes going down new, unforeseen avenues. In Zoom's case, it sees plenty of growth to come in areas like telehealth and Zoom phone, a multifaceted business communication tool.

Jon Quast 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$75.89 (2.19%) $1.63

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.