Zoom Video Communications (NASDAQ:ZM) tumbled after its recent earnings report, and the stock now trades at a steep discount to its previous heights, despite solid growth and monster profits.
In this segment of "The Five" recorded on Nov. 23, Fool contributors Jason Hall, Jeremy Bowman, Taylor Carmichael, and Connor Allen discuss Zoom's recent pullback and whether it's a buying opportunity as well their general approach when their favorite stocks fall.
Jason Hall: But first, let's hit the Zoom thing again. Zoom released earnings yesterday, stock gets smashed again today. Company posted revenue of $1.05 billion. That was 35 percent higher. It beat Wall Street's estimates. Earnings came in at $1.11. That was a 68 percent increase, also beating Wall Street's analysts. It's a big slowdown of growth. I think there were five quarters in a row or maybe six quarters where revenue was up at least 160 percent, and it was up 300 percent, a couple of those. Growth has slowed. But here's the thing. The stock today, I think it closed at a 52-week low, if it didn't close at it, it hit the 52-week low at some point today, that's for sure. We have a two-part question and Trevor actually suggested this question to us earlier today. First, Jeremy, I'm going to ask you to kick us off here, how do you react when a stock in your portfolio or maybe one you've been watching really closely falls that much in a single day? Is it a buying opportunity or do you wait for the dust to clear?
Jeremy Bowman: I think nobody likes to see a stock like Zoom, which I do own fall. Where was it down 17 percent today. But I think it really depends on the reason. Sometimes, you see a case of where the stock falls and it's very clear that the market's reacting to short-term, there's like, we dialed back our estimates because of the supply chain or sometimes it's even something like, we're reinvesting in the business, so profits are going to be a little short this next couple of quarters. I remember Target had a movement like that earlier this year. I think sometimes it can be a good reason to double down to invest in the stock if you spot a short-term reason, but other times, it feels more structural like what we saw with Peloton a few weeks ago. That revealed a pretty big crack in the business that I think a lot of us didn't anticipate. I think it's hard to have general rule for that. You have to take it on a case-by-case basis.
Jason Hall: I think that's a key thing right there. Definitely a lot of it depends. Taylor, what about you?
Taylor Carmichael: That's a good question. What I love actually is when I know why the stock's going down and the market is wrong, and I know the market is wrong. That just makes me exuberant. That makes me happy. A lot of times, you don't know why. Sometimes, there's massive moves in stocks and sometimes the whole market is going down. When you have that the whole market is going down, I just duck my head and try not to look. But when COVID-19 was hitting a year ago, early 2020, you knew exactly why the market was going down. There was no question about it and I was a strong bull in that mess. I just knew we were going to come back and so it was ugly time for the stocks you're holding, but it's always exciting when you're trying to buy things to get a cheaper price. Zoom's a special case. The market loves Zoom early, it's a COVID-19 stock. The market loved it when COVID-19 hit and everybody just jumped into Zoom and now it's predictable that as we wind down from COVID, people are taking profits and getting out. I think these are both those times that were buying opportunities. If you missed Zoom a year-ago in early 2020, you didn't buy it, you didn't jump in. Now, this might be a good time as people are getting out because Zoom's a powerful long-term story. Obviously, there has been a COVID effect and people were on Zoom a lot. But I think people like working from home. I think Zoom calls on The Motley Fool are going to continue and we're going to keep doing this and it's really neat ability to do your job from home or from wherever. We could travel. Airbnb on their conference call, talked about combining them with Zoom and people just traveling the world and still working. You take your Zoom with you. You take your laptop with you, and you can work from anywhere, and how powerful that is and you couldn't do that five years ago. In general, I think as Jeremy said, it all depends. It depends on why the stock is going down. If you know why. There could definitely be when there's these really big moves, it can definitely be a buying opportunity, but it's always hard to predict short-term stuff.
Jason Hall: Yeah, that's a big key right there. Connor, I would love to hear your thoughts on this too.
Connor Allen: Yeah. For me, when a stock falls a lot, as an analyst, I put more work than most people would do into each company that I own. I know my thesis of why I own it. I know a lot about the company and it's almost like you have a relationship with the company. You're like, I love this company, this is the future and this is why I'm investing in it. It's a little bit easier for me to see a 20 percent drop in a stock that I really like, and I'm just like, I'm not going to touch it, is my thesis still intact? If so, I'm still owning this company. But it hurts me when my thesis actually is broken from something that causes a 20 percent drop. For example, Zillow, that happened this quarter when they came out and said that they were stopping their iBuying process, I sold the company because that was proof that the optionality that I thought they had wasn't going to work out. I thought that was going to be a cash cow for the business. When that happened and the stock sunk 20 percent, that hurt.
Jason Hall: It fell for a clear reason and a legitimate reason. The thesis for the business completely changed, just like that.
Connor Allen: Yeah, I was just saying, when you look at what has happened to a lot of companies this quarter is even when they have a good earnings report and they fall 10-15 percent, Upstart's a great example for me, where I'm like, I'm buying this. There is times to buy the dip and there are times to sell on the dip, and I think that's what a lot of investors just don't understand that every dip is not a buying opportunity. But when it is, it can be great, and for a lot of investors.
Jason Hall: I think to me the key is that 99.9 percent of the time, there's no action that ever needs to be taken at all. We should buy regularly for most people, to have a regular cadence of buying and investing and once you own it, you follow the business and the thesis and then your glacial about changing anything. If you're planning to add money, that makes sense. But I think for me the best practice I found is slowing everything down. Don't do anything quickly. Because unless I know like you're talking about, Connor, like Zoom for an example, Zoom is like the rare example where without the Fool's disclosure guidelines, I would have bought Zoom stock today. I absolutely would because I know the business down. I was up to 2:00 AM doing a cash-flow workup of trying to value the business over the next 10 years. I had pretty legitimate reason why I was ready to act quickly because I believe in this business and I want to own more of it. But I think in general, the best thing for most people to do it for me absolutely it's to slow it down and almost always works out better if I just add an extra day before I do whatever I'm going to do and make sure why am I making this decision? Am I making it because the price fell, or am I making it because I think this is an incredible business that I want to own long term, and if it's the former and not the latter, then I'm making a mistake. Adding that extra day and even if the stock price, maybe tomorrow, Zoom stock goes up 10 percent and I miss the perfect opportunity, so what? Maybe the more I think about it and maybe I'll come to the conclusion that maybe I don't need to add Zoom. Maybe there's enough, maybe I need to be buying more Upstart. I think slowing the process down and not letting those impulses, whatever they are, make the decision is the healthiest thing most of us can do. It is certainly the case for me.