Zoom (ZM) P/E Ratio Soars to 1,790 Ahead of Earnings

Zoom Video Communications, Inc. (ZM) reports second quarter 2020 earnings after Monday's closing bell, with analysts expecting a profit of $0.45 per share on $500.3 million in revenue. The company rallied more than 7% in May after beating top- and bottom-line first quarter estimates and guiding both second quarter and fiscal year metrics to much higher ground. The stock heads into the release trading close to an all-time high after lifting more than 430% so far in 2020.

Key Takeaways

  • Zoom stock has rallied more than 400% since the first trading day in January.
  • Zoom's growth may be hampered by the downturn in COVID-19 infections around the world.
  • The stock's price-to-earnings ratio (P/E) has risen to an astronomical 1,790.
  • Accumulation has failed to post a new high with price this week, setting off a bearish divergence.

The stock caught fire in the first quarter after millions around the world were told to stay at home to slow the spread of the COVID-19 pandemic. Zoom's virtual meeting place software surged in popularity during this period, becoming the go-to application for businesses, social groups, and television hosts. Security issues marred positive press during the initial ascent, but the Silicon Valley upstart has now added protective layers to rebuild confidence.

Wall Street has grown cautious on Zoom due to rapid share gains and reopening efforts that have allowed most businesses to resume in-person operations. The stock is currently rated a "Moderate Buy" based upon 12 "Buy," 8 "Hold," and 2 "Sell" recommendations. Price targets currently range from a low of $180 to a Street-high $300, while the stock mounted the high target earlier this week. This placement raises the odds for a major selloff if results and guidance fail to exceed expectations.

A consensus estimate is a figure based on the combined estimates of analysts covering a public company. Generally, analysts give an estimate for a company's earnings per share (EPS) and revenue; these figures are most often made for the quarter, fiscal year, and next fiscal year. The size of the company and the number of analysts covering it will dictate the size of the pool from which the consensus estimate is derived.

Zoom Daily Chart (2019 – 2020)

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

The company came public at $65 in a well-received April 2019 initial public offering (IPO), triggering a rally that topped out at $105 in June. The stock built a small topping pattern at that level and broke down in September, slicing through the IPO opening print in October before posting an all-time low at $60.97. A bounce into November failed, yielding a successful test at the low in December, ahead of a rally wave that mounted the breakdown level in January.

The stock surged higher in February in reaction to the growing pandemic, posting a new high at month's end. Volatility spiked into April, but price action held firm, with each downdraft attracting committed buyers. Buying pressure eased in late April above $180, ahead of a June breakout that stalled near $280 in July. The stock worked off extremely overbought technical readings into mid-August and took off once again, posting an all-time high above $300 this week.

Zoom Short-Term Outlook

The on-balance volume (OBV) accumulation-distribution indicator topped out about six weeks ago and entered a holding pattern along with price. OBV has failed to post a new high in August, despite the recent price breakout. This marks a modest bearish divergence, suggesting that sidelined investors are keeping their powder dry ahead of next week's confessional. This lack of buying power also reflects that Wall Street targets haven't been raised ahead of the news.

Summing up, the stock worked off overbought technical readings during the six-week trading range and has hit new highs, but there's greater-than-average caution heading into earnings due to 400%-plus gains and a P/E ratio that has risen to an astronomical 1,790.62. Taken together with the receding pandemic, the company may need to report a blowout quarter and raise guidance to attract further upgrades and fresh investment.

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. The P/E ratio is also sometimes known as the price multiple or the earnings multiple.

The Bottom Line

Zoom Video Communications stock has grown extraordinarily expensive after a massive 2020 uptrend, adding considerable risk ahead of next week's earnings report.

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

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