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Why Shares of Five9 Tanked Nearly 15% Today

By Nicholas Rossolillo – Aug 31, 2021 at 1:16PM

Key Points

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The stock's fate is now tied to Zoom, and this week, that's not a great thing.

What happened

Shares of enterprise contact center outfit Five9 (FIVN -2.69%) were down nearly 15% as of 12:45 p.m. EDT. The cloud software company was being hit after Zoom Video Communications' (ZM -1.90%) second-quarter earnings report disappointed, sending Zoom stock tumbling over 16%. With a Five9 shareholder buyout consisting of Zoom stock on the way, Zoom's poorly received quarterly update and lower share price isn't great news for Five9 now that the two companies' fates are tied together. 

So what

As a reminder, in July Zoom announced its intention to acquire Five9's enterprise communications platform. The purchase price will entitle each Five9 owner to 0.5533 shares of Zoom for every share of Five9. Thus, with Zoom tanking, Five9 is adjusting down as well to account for the pending merger.  

Someone using video conferencing software.

Image source: Getty Images.

Now what

This move down for Five9 -- and for Zoom, as Five9 owners who choose to hold onto their stake will eventually have their stock converted into Zoom shares -- is hardly the end of the world. Though Zoom's Q2 earnings report left some investors wanting for more, it could hardly be viewed as bad news. Revenue was over $1.02 billion, up 54% year over year and easily topping management's previous guidance for as much as $990 million. Full fiscal-year revenue guidance was also raised to a range of $4.005 billion to $4.015 billion (previously $3.975 billion to $3.99 billion).

So why the negative reaction? Even after Zoom has been cut in half from its all-time high price reached last autumn, this is still a premium-priced company. Investors expect double-digit percentage growth to continue for the foreseeable future, and a valuation of nearly 22 times expected full-year sales is still viewed as "expensive" by many. Clearly, many with a vested interest were hoping for a bigger upgrade to financial guidance.

Nevertheless, Zoom is still expanding at a rapid clip, and the upcoming addition of Five9 (which has generated $522 million in sales over the last 12-month stretch, a 31% year-over-year increase) will help it build on its lead in cloud computing-based communications for individuals and businesses.  

Nicholas Rossolillo and his clients own shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Five9 and Zoom Video Communications. The Motley Fool has a disclosure policy.

Stocks Mentioned

Five9 Stock Quote
$66.22 (-2.69%) $-1.83
Zoom Video Communications Stock Quote
Zoom Video Communications
$72.90 (-1.90%) $-1.41

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

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