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Why Zoom Video Communications Stock Crashed Last Month

By Anders Bylund – Dec 9, 2021 at 10:46AM

Key Points

  • Signs of an accelerated end to the COVID-19 crisis weighed on Zoom's stock in November.
  • Slowing top-line growth in last month's third-quarter report didn't help, either.
  • Zoom could be a decent buy after the recent price correction.

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The poster child of pandemic-based winners is coming back down from that temporary high. That might actually be good news for some investors.

What happened

Shares of Zoom Video Communications (ZM 3.68%) fell 23% in November, according to data from S&P Global Market Intelligence. The online meetings specialist's red-hot trajectory in 2020 turned sour this year. Zoom's stock has now lost more than half of its value over the last 52 weeks, missing out on a 27% gain in the S&P 500 market index:

ZM Chart

ZM data by YCharts

So what

Zoom's November pain started in the first week of the month. Pharmaceuticals giant Pfizer presented strong results from trials of an anti-coronavirus pill, driving many stocks sharply higher as investors saw a quicker end to the global health crisis. The same idea undermined Zoom's business prospects as the need for remote video meetings should fade out as workers go back to their office desks. Zoom shares closed 6% lower that day.

The stock took another big hit two weeks later, making a 14.7% retreat on Nov. 23. This time, the culprit was a solid earnings report with hints of worse news to come.

Third-quarter sales rose 35% year over year to $1.05 billion. Adjusted earnings increased by 12% to $1.11 per diluted share. Your average analyst would have settled for earnings near $1.09 per share on revenue in the neighborhood of $1.02 billion. That type of modest surprise would normally be enough to support even a surging stock price. Not this time, and here's why:

ZM Chart

ZM data by YCharts

The business boost that Zoom enjoyed at the height of the pandemic is clearly fading away, with or without Pfizer's new coronavirus treatment and other recent developments. That's a scary prospect for many investors, especially if they picked up Zoom stock in the hope of scoring enormous short-term gains.

A computer user sits in deep thought in front of a living room bookcase.

Image source: Getty Images.

Now what

The COVID boost may be going away but it also left a lasting imprint on Zoom's reported results and shareholder returns. Remember that disappointing one-year price chart at the top of this article? Let's stretch it out to a two-year view instead and add one important financial metric:

ZM Chart

ZM data by YCharts

Shareholders who got in before the pandemic have seen their investment triple in two years. Over the same period, revenue rose more than sixfold and annual free cash flow skyrocketed from $90 million to $1.65 billion.

In other words, Zoom Video's business is much healthier than it might look in the context of year-over-year comparisons. All things considered, Zoom could actually be a decent buy at today's reasonable prices.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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