Bears Hold an Edge Ahead of Zoom (ZM) Earnings Report

Zoom Video Communications, Inc. (ZM) reports third quarter 2020 earnings after Monday's closing bell, with analysts looking for a profit of $0.76 per share on $694 million in revenue. If met, earnings per share (EPS) will mark an 844% profit increase compared to the same quarter in 2019. The stock took off for the heavens after blowing away second quarter top- and bottom-line estimates in late August, lifting to an all-time high in October.

Key Takeaways

  • Zoom stock rallied more than 850% between the start of January and October's all-time high.
  • The price-to-earnings (P/E) ratio has lifted to an astronomical 546 despite the six-week correction.
  • Market players have been rotating out of COVID beneficiaries and into recovery plays in recent weeks.
  • Zoom stock could remain range bound well into 2021.

Bullish sentiment on Zoom has deteriorated since that time, with Pfizer Inc. (PFE) and Moderna, Inc. (MRNA) vaccine news triggering an exodus out of COVID-19 beneficiaries and into 2021 recovery plays. The downdraft dropped the stock more than 35% into the Nov. 10 low, breaking 50-day exponential moving average (EMA) support for the first time since January. A slow-motion uptick into new resistance has generated little buying interest, raising the odds for a bearish reaction to next week's release.

Zoom's P/E ratio stands at an astronomical 546 despite the correction, but that will drop after another strong quarter. However, investors are now looking at the future rather than the rear-view mirror, trying to gauge the impact of a post-COVID world. While we know that many corporations have adopted the virtual meeting space with open arms, no one is really knows how the paradigm shift will affect the company's growth in coming years.

Wall Street consensus has grown more cautious due to historic share price gains, with a "Moderate Buy" rating based upon 11 "Buy" and 12 "Hold" recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $315 to a Street-high $611, while the stock is set to open Wednesday's session more than $40 below the median $478 target.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its EPS. It is sometimes known as the price multiple or the earnings multiple. P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison.

Zoom Daily Chart (2019 – 2020)

Chart showing the share price performance of Zoom Video Communications, Inc. (ZM)

The company came public at $65 in April 2019 and eased into an uptrend that topped out at $106 in June. It broke down from a small topping pattern in September, entering a decline that held near the IPO opening print into December. The subsequent uptick reached the 2019 high in February 2020, setting off a breakout that exhibited high volatility into the April peak at $181. It settled near that level into late May, breaking out and posting impressive gains into July.

Second quarter earnings triggered a high-percentage buy gap on Sept. 1, followed by two rally waves into the Oct. 19 all-time high at $588.84. It pulled back to the 50-day EMA at the start of November and broke down one week later, descending to a two-month low in the $360s. The stock has now bounced back above $400 but can't find the buying power needed to remount the broken moving average. This provides bears with a major advantage heading into the news.

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in October, giving way to a modest distribution wave that is still in progress. Meanwhile, the monthly stochastic oscillator has entered a sell cycle that predicts weakness into the first quarter of 2021, while the weekly indicator has reached an extremely oversold level, predicting two-sided but range-bound action that isn't likely to reward trend followers.

Range-bound trading is a trading strategy that seeks to identify and capitalize on stocks trading in price channels. After finding major support and resistance levels and connecting them with horizontal trendlines, a trader can buy a security at the lower trendline support (bottom of the channel) and sell it at the upper trendline resistance (top of the channel).

The Bottom Line

Zoom stock has entered an intermediate correction that is unlikely to end after next week's third quarter earnings report.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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