The rise during the pandemic (as we all adopted the platform) was followed by the 66% drop in the past year as we’ve come out the other side. But now that Zoom shares have erased a lot of those gains, is it worth me buying?

The rise and fall

At the end of February 2020, Zoom shares traded at $105. By October that year, the share price was comfortably above $500. The company had gone from being a modest player in the video conferencing space to suddenly being the platform of choice for everyone. The broad appeal and ease of use meant that we used it for personal interactions, business meetings, and everything in-between.

Since last summer, the picture changed. Easing of restrictions in many places around the world meant that reliance on Zoom waned. This can be seen in Zoom shares, with that 66% drop meaning it now trades back at $110, having lost all of those pandemic gains.

I didn’t invest in Zoom during the pandemic. So the question is does in now make sense to buy some shares given that I’m not paying for any pandemic premium?

Why Zoom shares are appealing

Even though we moved out of the pandemic slowly in 2021, the full-year results for Zoom still showed strong growth. Revenue increased 55% to $4.1bn from 2020, with the operating margin at a generous 25.9%.

Importantly, the business is also developing the platform to make sure it doesn’t get left behind. For example, it has launched Zoom Events and Zoom Whiteboard, both of which should help retain users beyond simply videoconferencing.

Finally, I think Zoom shares are appealing due to the engrained nature of users. Many still have hybrid work environments, meaning that video conferencing is required. Given that there’s still uncertainty in the world about the future of Covid-19, I would expect many companies are paying to extend Zoom licenses.

Points to be aware of

One point I must flag with Zoom shares is that the current price can be seen as the fair value. Having a vision of buying to target $500 I think is simply unrealistic. It was buoyed by speculative buyers, and those worried about how bad the pandemic might get.

Now that it’s back at $110, the price-to-earnings ratio is just over 25. This could be perceived as the right value, with any upside limited. If results start to fall off in coming quarters, there’s no reason why it can’t head lower.

Overall, I do think Zoom shares are a lot more attractive to consider buying now that the pandemic premium has been removed. On that basis, I’m seriously thinking about buying.

This stock could zoom upwards

After soaring in 2020 due to the pandemic, Zoom (NASDAQ: ZM) has fallen back significantly this year. In fact, over the past year, the stock is down 54%. This is mainly due to fears that the excellent growth was solely due to the pandemic, and it will slow significantly in a post-Covid world, with face-to-face meetings the norm once again. But with the fears of the new variant, this Covid stock may be an excellent pick once again.

Despite this, many people believe that stock is just a coronavirus play, and long-term growth prospects are shaky. But while this is a risk, I believe Zoom is more than just a Covid stock, and the new variant simply gives it a further boost. In fact, for the FY2022, the company expects revenues of over $4bn, over a 50% rise year-on-year. This is despite the fact that face-to-face meetings have become far more common once again. Therefore, this is a stock I’m tempted to add to my portfolio.

A telehealth provider

I’ve written about my optimism for Teladoc multiple times, and the recent variant news has reinforced this. In my opinion, the stock is oversold, and is now 62% off its recent high. Over the past year, it has also fallen 45%. Like Zoom, this has been due to fears of slowing growth after Covid.

But with the new variant, this offers an ideal opportunity for the company to gain new customers for the long term. I believe this should prompt the stock to recover some of its recent losses, and therefore I may buy more.

A UK Covid stock

ASOS (LSE: ASC) is another stock that has struggled in recent months, especially as revenue growth for the next financial year is only expected to be around 10-15%. Issues of labour cost inflation and other increased costs have also had a negative effect. This has led to fears around the company’s profit margins, which are currently at only 5.3%.

But I think that the new variant could lead to increased demand, especially if many shoppers decide to go back to online shopping. This should help boost profits, which will also allow heavier investments in parts of the business, such as in the US.

Even without any potential boost from this new variant, the ASOS share price still looks too cheap. In fact, it has a price-to-earnings ratio of around 20, and a price-to-sales ratio of under 1. For a growth stock, this is incredibly cheap. As such, although there are several risks to consider, this is a Covid stock that I’m very tempted to add to my portfolio.

It’s not all that surprising though. Thinking back to 2020 when the pandemic first hit, certain stocks and sectors outperformed others. This pattern began to emerge on Friday when stay-at-home stocks rallied. These businesses could be about to benefit again if the new strain of Covid leads to more strict lockdowns.

Let’s see if there’s an opportunity here for my portfolio.

A US stock for video calling

The first company is Zoom (NASDAQ: ZM) as the share price popped almost 6% on Friday. However, this does mask an overall weekly fall of over 12% after its third-quarter results were announced, which I wrote about here. And it’s down over 50% year-on-year.

The main theme in Zoom’s results was a slowdown in the rate of growth. This is understandable given that workers have begun to return to offices, which lessens the need for Zoom’s video conferencing platform.

But does this new Covid strain change things, and will growth now begin to increase?

I’m not so sure. I do think it reinforces the need for Zoom’s platform and that subscriptions will be maintained. However, I don’t think it will accelerate growth to the levels the company achieved in the earlier part of the pandemic. Most businesses that need a Zoom subscription will likely have one by now, so a new strain of Covid may reduce the likelihood of customer churn more than anything. I then have concerns over competition, with Microsoft Teams being a prime example. Microsoft has improved its video conferencing capabilities over the past 18 months, so Zoom has a big competitor now. This wasn’t the case in 2020 when it was the clear leader.

I still like the economics of the business. It achieves high profit margins and is cash generative. But its high valuation puts me off as I don’t think this new Covid strain marks a significant turning point in its growth potential. It’s staying on my watchlist for now.

A stay-at-home fitness company

The next company is Peloton (NASDAQ: PTON). Its share price jumped almost 6% on Friday too. However, the stock has had a torrid time this year, and is down by 69% on a year-to-date basis.

Will this new Covid scare mark a turning point for the share price?

Again, I don’t think it will. The company manufactures and sells stationary bikes and treadmills for at-home fitness purposes. An added membership subscription means users have access to classes, and can compete against other Peloton equipment owners. It’s a great idea, and the share price boomed when gyms were shut.

But I just don’t think gyms will shut this time round due to Covid. We have vaccines now, and I think governments are generally against the sort of strict lockdowns they imposed before. The company is also still loss-making, and only forecast to grow revenue by 14% in fiscal 2022.

I could be completely wrong about Peloton, and the new Covid strain may mean revenue grows way more than current forecasts. This might be the catalyst for the share price to rally to previous highs around $160, which is significantly more than the $46 share price today.

But for now, I think there are better US stocks to consider.

The Covid-19 pandemic created an ideal environment for many ARK companies including video meeting firm Zoom Video Communications (NASDAQ:ZM) and Roku (NASDAQ:ROKU), the digital media player specialist. These are two companies in ARK’s top six holdings that I believe encapsulate the ETF’s struggles this year. Up over 400% and 140% respectively in 2020, this year has seen both share prices come back down to earth. Cathie Wood remains optimistic though, buying the dips of both ‘stay-at-home’ stocks.

Zoom

Lockdowns gave Zoom the opportunity to accelerate growth beyond its wildest expectations. Last year, Zoom became a household name and even a verb cementing the company as a communications leader. These 2020 catalysts are waning, but Cathie Wood has continued to load up on the stock.

Last week, the company beat expectations on earnings and guidance. Yet following the update, the share price tumbled 15%. Why? Slowing growth in the number of its larger clients (those with more than 10 employees).

This metric grew at a disappointing 18% and suggests slowing growth among its most lucrative customers. This indicator is particularly important when I consider Zoom’s competition. Google and Microsoft have the pricing power to undercut competition such as Zoom. Their videoconferencing products also boast a more versatile and unified offering, attractive to large enterprises.

Zoom is building its own cloud contact centre service following the collapse of its proposed acquisition of Five9. New services like this will determine Zoom’s future growth but it would have benefited from absorbing Five9’s customer base. The acquisition and retention of customers could prove to be costly in the absence of lockdowns and the Five9 deal.

Roku

Like Zoom, the Roku share price took a dive following an earnings report in November. Despite beating on earnings estimates, it missed on revenue expectations. Deceleration in growth was partly blamed on supply chain issues. This impacted TV sales for the quarter, which dipped below pre-pandemic levels. Additionally, YouTube is pulling its apps from Roku. It remains to be seen whether that will dissuade potential customers from buying a Roku.

There are reasons for optimism, however. First Roku have entered the Latin American market. This is a huge opportunity as Brazil and Mexico are seeing huge growth in smart TV penetration. Roku can lean on its experience in the US to drive growth internationally.

Second, connected TV programmatic advertising could revolutionise digital media. Roku can capitalise on this potential boom. I’m particularly interested in its deal with Shopify, providing a lower barrier to entry for streaming TV ads as well as securing more small and medium ad dollars for Roku.

Cathie Wood is buying the dips. Should I?

I certainly see why Cathie Wood remains bullish on both Zoom and Roku, but see too much risk moving forward. It’s hard to argue that either company boasts an economic moat. Zoom is competing against tech behemoths Google, Microsoft and others. Roku is up against streaming, advertising and hardware titans including Amazon, Disney and Netflix. Their lofty valuations also deter me. Zoom’s P/E ratio is over 58 while Roku’s looks is an even bigger 113+. For these reasons, I won’t add shares of either company to my portfolio today.

So why has Zoom’s share price crashed? And has the fall provided a buying opportunity for me?

Why Zoom’s share price has tanked

The main reason Zoom stock has experienced a big decline this week is that the market was unimpressed with the group’s third-quarter 2021 results, posted Monday night.

In my view, the results weren’t terrible. For starters, revenue came in at $1.05bn, up 35% year-on-year, and ahead of Wall Street’s estimate of $1.02bn. Meanwhile, earnings per share amounted to $1.11 versus the consensus forecast of $1.09. The company also raised its full-year revenue guidance, albeit slightly.

However, there were a few things in the Q3 results the market didn’t like. One was the fact that Zoom’s addition of new customers with over 10 employees grew at just 18% – below pre-pandemic levels.

Another issue was guidance. Here, Zoom told investors it expects flat revenue for Q4 compared to Q3, along with a small decline in earnings.

It’s worth noting that on the back of these results, a number of brokers cut their share price targets for the stock. Bank of America, for example, went from $385 to $270. Evercore, meanwhile, went from $255 to $235.

“For now, investors will need some patience as we do not see any upcoming catalysts that would change the sentiment on the stock,” wrote Evercore’s analysts in a research note.

Should I buy Zoom stock now?

I use Zoom’s video conferencing software quite regularly and I think it’s pretty good. However, looking at Zoom from an investment point of view, I have a few concerns.

The first is in relation to the valuation. After the recent share price fall, Zoom still has a market capitalisation of around $61bn. That means the forward-looking price-to-sales ratio here is still around 15. That’s relatively high and doesn’t leave a huge margin of safety, in my view. If future growth is disappointing, the stock could fall further.

Speaking of growth, this is another issue for me. There’s no doubt that growth has been excellent throughout the pandemic. But it’s hard to know what it will look like after Covid-19 when the world gets back to normal. To my mind, there’s a fair bit of uncertainty here.

Finally, I’ve always had concerns about the level of competition here. Is there anything to stop rivals such as Microsoft (which is a massive player in the business productivity solutions space), Google, or Amazon stealing market share in the future? I’m not convinced there is.

Given these concerns, I’m going to leave Zoom on my watchlist for now. All things considered, I think there are better growth stocks I could buy today.

Even so, I need to understand why the stock just crashed before I buy. Let’s take a closer look.

Zoom earnings

I’m sure most people know Zoom nowadays. It became ubiquitous during the pandemic as workers were hosting remote meetings over its video calling platform. Like Alphabet‘s Google before it, the firm enjoyed the accolade of its name becoming almost the generic term for its key activity.

Well, the company released its third-quarter results on 22 November that showed revenue grew 35% to $1bn. Adjusted operating margin was an excellent 39% too. All sounds okay so far, and makes me think Zoom is showing signs of being a durable, quality business.

But the problem with Zoom is that it’s benefited hugely from the pandemic. So, as people have been returning to offices, growth today won’t be as impressive as this time last year. Zoom guided for fourth quarter revenue of $1bn, which is a 19% growth rate over last year. This is a big slowdown from the third-quarter growth rate of 35%.

In fact, revenue growth was as high as 300% as recently in Q1 this year. This is a worrying trend of declines.

Analysts slash Zoom share price target

After the earnings release, a number of analysts cut the target price for Zoom. Deutsche Bank lowered its Zoom share price target to $280 from $350, saying the decelerating growth is tough to like.

On the whole, though, analysts remain bullish. The aggregate share price target is $347, which is a huge 68% higher than the closing price on Tuesday. However, the revenue growth forecast for 2023 is about 18%, so I’d have to be content with this lower rate if I decided to buy the shares.

Should I buy?

I view Zoom favourably as a user of its video platform. As mentioned, almost becoming a verb in working environments (“I’ll Zoom you later”), is a rare thing and strengthens the brand.

I also think the economics are excellent as it achieves such high operating margins. Cash generation is impressive too.

But I do share the concerns of the analysts that have downgraded the share price. Zoom has been a huge gainer from the pandemic, so my thinking is that its big growth phase is over. The stock is still valued on a price-to-earnings ratio of 43. I consider this high for a company that has decelerating growth, and its best period may be over.

I also have concerns over valuations in the US right now. So there’s a risk that the Zoom share price falls on general market weakness.

For now, I’m going to keep the stock on my watchlist to see if it can accelerate growth again.

The rising Zoom share price

The initial surge in the Zoom share price started in April last year after the company announced its daily active users had risen by 50% from 200m to 300m in less than three weeks. Lockdown restrictions resulted in many offices being deserted as the majority of employees began working from home. So, the demand for reliable and scalable video communication technology skyrocketed within a matter of days, creating the perfect growth environment for the company.

And by the end of January this year, total revenue in 2020 grew by 325% from $623m to over $2.65bn. Meanwhile, profits surged from $26m to a record-breaking $672m. Needless to say, this level of growth is incredible. So, seeing the Zoom share price take off isn’t a surprise.

But over the past couple of months, the stock has produced some less than impressive returns. And yet, the company continues to report a stellar performance. In its Q1 earnings report for 2021, revenue grew once again by nearly 170% year-on-year. Meanwhile, its total number of customers increased by 354% to over 265,400. And its net dollar expansion rate is still higher than 130% for the eighth consecutive quarter. In other words, the company is getting more customers, while existing ones are increasing their spending.

So why is the stock going down?

The risks that lie ahead

As incredible as this growth has been, there is some uncertainty among investors that it will soon come to an end. And rightfully so, in my opinion. With the vaccine rollouts progressing relatively quickly in the US and UK, many employees will be returning to the office in the near future. Consequently, the need for video conferencing solutions will likely fall. And if its customers suddenly start cancelling their subscriptions, Zoom’s share price may take a substantial hit.  

What’s more, due to its impressive growth last year, the business’s market capitalisation increased phenomenally. Even today, after its recent decline, the company is still valued at a P/E ratio of around 130. Generally, a high valuation mixed with uncertainty is not a good combination and exposes investors to a high level of volatility.

The bottom line

Despite the valid concerns surrounding Zoom’s future growth potential in a post-pandemic world, I don’t believe the company will slow down as much as others may think. Many businesses like Facebook have already announced their intentions to continue work-from-home policies even after the pandemic comes to an end.

While I feel the return to the office is inevitable, I don’t believe the need for Zoom’s technology will disappear any time soon. Therefore, I think the company is still capable of continuing its enormous growth over the long term. And so, as an existing shareholder, the falling Zoom share price looks like a buying opportunity for my portfolio.

Recently however, many Wood stocks have been caught up in the tech sell-off. Many of her holdings have experienced double-digit declines.

Here, I’m going to highlight two Wood-owned stocks that have fallen 35% from their highs. Should I take advantage of the share price weakness and buy them for my own portfolio?

This Cathie Wood stock is down 40%+

One Wood stock that’s experienced a huge pullback is Zoom Video Communications (NASDAQ: ZOOM). Last year, it was trading near $570 at one point. However today, it’s trading near $320. That represents a decline of over 40%. It’s still up about 130% over a year though.

There’s a number of things I like about the business. For starters, it has a great product. It’s generally accepted that Zoom is the best video conferencing app on the market at present.

Secondly, it has a strong brand. Like Uber and Airbnb its brand has become a verb. For example, people say ‘let’s set up a Zoom call.’ Third, recent growth has been amazing. For 2020, revenue was up 326% to $2.7bn.

I do have some reservations about this Wood stock, however. One is the valuation. Currently, Zoom sports a market-cap of $95bn. That’s bigger than the vast majority of FTSE 100 companies, including the likes of BP and Vodafone. Currently, the stock’s forward-looking price-to-sales ratio is about 24. That’s high, which adds risk.

Another issue is the competition it faces from the likes of Microsoft and Google. Third, it’s hard to know how much we will all use Zoom when the world returns to normal. I expect Zoom to remain popular but, right now, it’s hard to make forecasts about future use.

Given these issues, I’m going to keep Zoom on my watchlist for now.

Wood’s third-largest holding

Another Cathie Wood that’s taken a huge hit in the recent tech sell-off is Teladoc Health (NASDAQ: TDOC), which provides virtual healthcare solutions. This stock – which is currently the third-largest holding in the ARK Innovation ETF – surged up to around $295 last year during the pandemic. However, since then, it’s fallen back to $180 – a decline of nearly 40%. Over a year, it’s up about 20%.

This is a stock I’m quite bullish on. One reason is that the virtual healthcare industry is forecast to grow substantially over the next decade. Between now and 2027, the global virtual healthcare market is expected to grow at around 25% per year.

Another is that the company is growing rapidly. Last year, revenue was up 98% to $1.1bn. This year, the company expects to generate revenue of $1.95bn-$2bn, which would represent top-line growth of 77-82%.

There are risks to the investment case, of course. In the short term, we may see a shift back to in-person doctor visits. This could impact near-term performance. The stock’s price-to-sales ratio of 14 probably doesn’t leave much room for error.

Additionally, the company is facing competition from the likes of Amazon and CVS Health. Amazon, for example, recently launched a telemedicine app.

Overall however, I like the long-term story here. I’d buy this Cathie Wood stock today.

With some companies bringing in permanent remote working, Zoom could be here to stay for many of us. If so, it might not be too late to benefit from further potential gains in Zoom shares.

Already Zooming higher

Although I can’t believe I’m saying this, I need to make sure I’m talking about the right Zoom company. As well as the Zoom I’m referring to, there’s also a company called Zoom Technologies. Incredibly, this company saw a huge 10x share price spike last year as investors confused it with the other Zoom! This move obviously retraced back when people realised, but it does show the importance of doing research.

Now that we’re looking at the correct company, how much of a move higher have Zoom shares already seen? Well over a one-year period, they’re up 230%. That’s a very strong performance. If we pull this back a little further to when Covid-19 was just starting to generate some noise (around mid-December 2019), they’ve gained even more. Over this timeframe, Zoom shares have rallied around 430%.

Not all of this move was purely speculative buying due to the pandemic. Zoom released full-year earnings in early March, showing that it had performed well during this period. Revenue was up 88% versus 2019, with 81,900 business customers. The growth in business usage was 61% from 2019.

Higher revenue also provided a huge boost for cash flow. Free cash flow stood at $113.8m at the end of the year, up almost 5x on the figure from the previous year. So it’s clear that the move higher in Zoom shares was well founded.

What’s the outlook for Zoom shares?

The big question in my mind is whether Zoom is a flash-in-the-pan. The pandemic will end eventually. Will people drop (or at least reduce) Zoom usage as we get back to normal? Or will our lives be in a new normal, where video conferencing is still very much needed?

If the usage of Zoom collectively drops, I struggle to see Zoom shares remaining at the current levels. It has a high P/E ratio of 142, and a market valuation of $100bn. Net income for the year was $21.4m, so there’s a huge premium being placed on the stock right now. I think this is assuming Zoom will continue to grow, which I think is a risky assumption.

I also believe that even if we do keep video conferencing, competition for Zoom will be intense. Microsoft Teams and Google Meet (from Alphabet) are just two examples of larger tech businesses that have the scale and ability to eat into its market share. 

From my angle, I struggle to see how buying Zoom shares right now would be justified. I think the potential upside is limited, whereas the downside could be significant. For that reason, I think I’ve missed the boat, and so would look at other ideas for stocks to buy.

Zoom shares surge

On 18 April 2019, Zoom Video Communications enjoyed a terrific IPO start. Many investors or, better said, speculators rushed to buy the company’s shares.

I wouldn’t say Zoom shares fell dramatically after the IPO rally. But at the end of 2019 all the previous gains were erased. Then, after the beginning of the lockdown period in March the shares began rising at a really fast rate. As can be seen from the graph, if you had invested $10,000 in Zoom, your stake would be worth about $40,000 today. From a technical perspective it seems they are due for a correction.

How about the company’s fundamentals? To start with, I quite agree that distance working will probably continue for a while. Some companies will likely allow their employees to work from home even after the end of the pandemic. It’s quite practical for many employers since they don’t have to pay rent and many other relevant expenses. So, companies like Zoom should grow well. And so should Zoom shares. 

I also agree with my colleague Michael Baxter that investing in high-tech shares might be some sort of a hedge against low GDP growth. In fact, in the past few years, well-established ‘cyclical’ companies like banks and miners didn’t do particularly well in terms of earnings. This is because the real global economy started slowing down long before the pandemic. But high-tech excelled. 

But is Zoom a reasonable company to invest in? 

Here are the company’s revenues and earnings over a four-year period.

Source: Zoom Video Communications

Looks like impressive revenue growth, doesn’t it? In 2019, Zoom managed to make a small profit of $7.58m. In 2020, Zoom’s net profit totaled $25.3m. All very well. But how about the valuations? The earnings-per-share (EPS) for 2020 was $0.09, whereas the stock price now is about $268. This brings us to the price-to-earnings (P/E) ratio of 2,977. Remember that a P/E of 20 is average, if not high. I appreciate that earnings might increase dramatically by 2021. But the thing is that you’d pay a high price today, if you decide to invest now. 

And how about the competitive landscape? Well, the high demand for video conferencing is matched by many suppliers. Plenty of firms offer a wide variety of very similar services. Think about Microsoft Teams, Skype, Cisco Webex Teams, Adobe Connect, Blue Jeans by Verizon and many other alternatives.

It’s not obvious that Zoom can easily compete with all these companies, and Zoom shares are trading at a really high premium to many other high-tech firms. For example, Microsoft’s shares are trading at a P/E ratio of about 30. Don’t forget that Miscrosoft is a very well-established corporation with a high credit rating.

A perfect buy for Brits?

I understand how tempting it might be for Brits and investors from other countries to buy high-tech stocks. The US offers plenty of opportunities to do so. What is more, investing in overseas companies might be good in terms of diversification. But Zoom shares aren’t, in my opinion, a great fit for a value investor.