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Analysts optimistic about Zoom's post-COVID-19 future despite recent stock drop

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Analysts optimistic about Zoom's post-COVID-19 future despite recent stock drop

Zoom Video Communications Inc.'s meteoric rise in 2020 is unlikely to unravel in 2021, despite investor skittishness about the resilience of the work-from-home software boom after the COVID-19 pandemic subsides, analysts said.

In quarterly results released Nov. 30, Zoom beat company and analyst estimates for its fiscal third quarter, with revenue up 367% year over year to $777.2 million, representing its third consecutive period with triple-digit percentage growth. But the stock fell after the company forecast slowing growth ahead, predicting a gain of about 329% in revenue for its fiscal fourth quarter. The stock immediately lost about 5% in after-market trading Nov. 30 and continued to fall Dec. 1, closing at $406.31. Even so, that closing price represented year-to-date growth of nearly 500% for the application software company's share value.

It's not the first indication that some investors are worried about Zoom's future. The company's stock hit an all-time high of $500.11 on Nov. 6 and incurred its sharpest drop to $376.10 on Nov. 10, after pharmaceutical company Pfizer announced positive trial results of its COVID-19 vaccine. But analysts largely say that fears about whether the company can maintain its success after people return to offices and schools in great numbers are overblown.

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"We realize that investors may wish to sell shares of Zoom as a COVID vaccine is expected to be widely distributed in the US around May/June of 2021, but we believe that Zoom will continue to be widely used even after such a vaccine is distributed as we believe that the future of work and play is a hybrid one," FBN Securities analyst Shebly Seyrafi wrote in a note to clients.

Seyrafi noted, for instance, that Zoom grew its base of large customers, with 1,289 customers generating more than $100,000 in trailing-12-months revenue as of the most recent period, up 136% year over year. The analyst reiterated his "outperform" rating on Zoom's stock, but lowered his price target to $525 from $575 in response to the fiscal fourth-quarter guidance.

RBC Capital Markets analyst Alex Zukin also reiterated his "outperform" rating on Zoom's stock and reduced his price target to $550 from $600, noting that the company may lose some of its momentum going forward.

"Unlike last quarter, second-derivative metrics showed deceleration, which makes some investors incrementally nervous about what post-COVID revenue growth will look like," Zukin wrote in his analyst note. "While growth vectors are numerous, we estimate a material sequential decrease in gross and net bookings despite positive commentary around churn across all segments."

However, Zukin predicted that the company is primed for a successful fourth quarter, given the traditional heavy enterprise buying cycles in the holiday season, and said the business model overall has staying power.

"Zoom continues to be in the pole position to enable a remote and hybrid large enterprise workforce for years or even decades to come," Zukin wrote.

D.A. Davidson & Co. analyst Rishi Jaluria, who maintained his "buy" rating and $600 price target on Zoom's stock, wrote in an analyst note that Zoom shares declined partially on gross margins that were light of consensus and down sequentially, driven by the volume of free users and higher public cloud usage. Nevertheless, he expects the company's tailwinds to sustain post-pandemic and that there are additional incremental growth drivers yet to come.

"We believe we are headed into a hybrid remote work future and Zoom will increasingly become necessary to allow companies to function at a high level," Jaluria said. "In fact, whenever offices do start to reopen, we see a replacement opportunity for Zoom to unseat legacy solutions, including in hardware meeting rooms and PBX [private telephone networks]."

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Raul Castanon, a senior research analyst covering workforce collaboration and communication platforms at 451 Research, a unit of S&P Global Market Intelligence, said Zoom's rapid evolution from a video-conferencing platform into a unified communications provider has established the company as a direct competitor to much larger companies.

"With the global launch of [voice-calling solution] Zoom Phone, the company is now on par with incumbents like Microsoft and Cisco," Castanon said. "Zoom also has the advantage of being born in the cloud, which gives it an advantage over vendors like Cisco that have faced challenges in transitioning their legacy products."