Zoom (ZM) Could Add to Historic Gains

Zoom Video Communications, Inc. (ZM) stock flashed green on Monday despite the biggest down day since early September, highlighting resiliency that could translate into much higher prices in coming months. The early onset of the second pandemic wave has underpinned buying interest, potentially reversing the slow push for normalcy that started in the second quarter. Even so, the stock is very expensive, boasting an astronomical price-to-earnings ratio (P/E) of 673 that translates into high risk, regardless of exposure size or entry price.

Key Takeaways

  • Zoom is holding up much better than other tech stocks.
  • The second pandemic wave could ignite strong buying interest.
  • Operating margin improvement bodes well for higher stock prices.

The company raised long-term operating margin guidance from 20% to 25% at "Zoompedia" earlier this month, prompting a series of upgrades. It continues to ramp up security features after bugs threatened to derail user growth earlier this year, with end-to-end encryption now available to all users. However, the software code is still in beta stage while programmers take a close look at feedback.

Zoom stock is exhibiting impressive relative strength compared to the broad tech universe, posting a series of new highs since early September, when the Nasdaq 100 topped out. Zoom stock has not traded below the 20-day simple moving average (SMA) since Aug. 17, while monthly oscillators are sticking like glue to extremely overbought readings. Accumulation continues to hit new highs as well, highlighting continued market leadership and institutional interest.

Wall Street consensus on Zoom stock has grown more cautious in recent months due to historic share gains, yielding a "Moderate Buy" rating based upon 12 "Buy" and 12 "Hold" recommendations. One analyst has called it quits, telling clients to take profits and move to the sidelines. Price targets currently range from a low of $315 to a Street-high $611, while the stock has opened Tuesday's session nearly $48 above the median $477 target.

Operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company's operating income by its net sales.

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 ticked higher, topping out at $105 in June. Price action carved a small topping pattern at that level and sold off on higher-than-average volume in September, breaking through the IPO opening print before bottoming out at $60.97. The subsequent uptick failed, giving way to a higher low in December, followed by a sturdy uptick that remounted that psychological level in January 2020.

The rally reached the prior high in February and broke out, but volatility through April limited share gains. Resistance in the $170s held firm until early June, when price ejected into a sustained trend advance that has carved series of small-scale pullbacks. This corrective action has been extremely effective in working off short-term overbought readings, allowing price rate of change (ROC) to sustain a healthy pace.

The stock rallied nearly 41% after Zoom posted blowout earnings in early September and has carved two new highs since that time. However, the surge to an all-time high earlier this month is now getting tested, with price stuck like glue to the $500 level. Short-term readings have hit oversold levels, so this is where a bounce should unfold. Even so, watch that level closely in coming sessions because a breakdown will expose a quick 70 points of downside into the 50-day exponential moving average (EMA).

The rate of change (ROC) is the speed at which a variable changes over a specific period of time. ROC is often used when speaking about momentum, and it can generally be expressed as a ratio between a change in one variable relative to a corresponding change in another. Graphically, the rate of change is represented by the slope of a line.

The Bottom Line

Zoom stock continues to exhibit unusual strength, setting the stage for even higher prices.

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

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