Zoom was one of the big winners of 2020, its share price rocketing from $68 at the start of that year to $559 by October 2020. One year on, Zoom’s share price has crashed back down to earth, closing below $250 on 11 November. The shares are currently down more than 25% year-to-date. That’s not to say that business hasn’t been good. It has. Zoom’s quarterly revenue exceeded $1bn for the first time in Q2, as profits came in at $317m, or $1.04 a share. However, the company’s guidance for Q3 was disappointing, with management saying that it expected Q3 revenue to remain flat quarter-on-quarter, although profits were forecast to grow to $340m-$345m, or $1.07-$1.08 a share.
For the full fiscal year, Zoom said it expected to see revenue of $4bn, an improvement on expectations at the start of the year. It is therefore odd that the shares have declined so much. To understand why, we must look at Zoom’s valuation. Even at its current level of around $75bn, Zoom’s market capitalisation still appears high for a video conferencing company with technology that is easily replicable. Although Zoom is profitable, it doesn’t really have any other strings to its bow. Its competitors – LogMeIn, Cisco’s Webex, and Microsoft-owned Skype and Teams – are starting to up their game, even if they aren’t their owners’ core products, which could mean that Zoom has to work even harder to stay in the race. Zoom has done well, but it will have to continue to invest in improving its infrastructure.
Industry competition is likely to continue to subject Zoom’s valuation to close scrutiny, with some investors questioning whether the current level can be sustained. Q3 profits are expected to come in at $1.08 a share, in line with company guidance.