Zoom's stock 'is coming to life,' says Carter Worth of Worth Charting

Key Concepts

• Zoom Stock Performance: From a pandemic darling with a peak market cap of over $160 billion, Zoom experienced a 90% collapse from its highs and has been trading sideways for years.
• Bearish to Bullish Reversal: Technical analysis suggests Zoom's chart patterns indicate a potential shift from a downtrend to an uptrend.
• Chart Patterns: Mentioned patterns include wedges, trendlines, and cup and handle/rounding bottoms, all interpreted as signs of a reversal.
• Enterprise Client Growth: A significant increase of 100,000 enterprise clients was noted.
• Financial Strength: Zoom possesses a substantial cash hoard, representing a third of its market value, and has a $2.7 billion buyback program.
• Valuation: The stock is trading at approximately 14 times earnings, which drops to under 10 times earnings when backing out cash.
• Churn: While a potential negative, churn rates improved in the last reported quarter.
• IPO and Secondary Offering: Zoom IPO'd in 2019 and capitalized on the pandemic boom by selling shares at $340 in 2020.

Zoom Stock: From Pandemic Darling to Potential Reversal

1. Historical Performance and Current Outlook

Zoom (ZM) was a highly successful stock during the COVID-19 pandemic, reaching a peak market capitalization exceeding $160 billion. However, the stock has since lost 65% of its value. Despite this decline, shares have shown a rally from their April lows, leading to a technical analysis suggesting a "bearish to bullish reversal."

2. Technical Chart Analysis: Signs of Reversal

• Initial Run-up and Collapse: Zoom experienced a remarkable "10-bagger" run, increasing from $60 to $600 between autumn 2019 and autumn 2020. Following this surge, the stock experienced a 90% collapse. For the past three to four years, the stock has been trading sideways, described as "walking along the bottom of the pond."
• Chart Patterns Indicating Reversal:
  • Wedge/Trend: A pattern identified as a wedge or trend is interpreted as a sign of reversal.
  • Break of Downtrend Line: The chart shows a move above a long-standing downtrend line, a key indicator of a potential trend change.
  • Cup and Handle/Rounding Bottom: Another interpretation of the chart pattern is a "cup and handle" or "rounding bottom," both classic formations signaling a bullish reversal.
• The Question of Value Traps: The analysis poses the question of whether Zoom is a "value trap" (dead money) or "coming to life." The judgment presented is that the stock is indeed "coming to life."

3. Fundamental Analysis and Business Momentum

• Investment Thesis: One commentator (Karen) has taken a long position in Zoom, having bought shares in the previous quarter in the $60 range. This decision is supported by several fundamental factors.
• Strong Earnings and Client Growth: Zoom reported a strong earnings report, with significant growth in enterprise clients, adding "100,000 more C" (likely referring to enterprise customers).
• Financial Strength and Capital Allocation:
  • Cash Hoard: The company possesses a substantial cash reserve, which constitutes a third of its market value.
  • Share Buyback Program: A $2.7 billion share buyback program is in place.
  • IPO and Secondary Offering Strategy: Zoom IPO'd in 2019. Recognizing the unprecedented opportunity presented by the pandemic in 2020, the company strategically sold nearly six million shares at $340 per share, a move described as "very, very nice work by them."
• Business Momentum: There is perceived momentum in the business.
• Churn Improvement: While churn (customer attrition) is acknowledged as a potential negative, the last reported quarter showed an improvement in churn rates.

4. Valuation Metrics

• Price-to-Earnings Ratio: The stock is currently trading at approximately 14 times earnings.
• Cash-Adjusted Valuation: When the company's significant cash holdings are factored in, the valuation becomes more attractive, dropping to "closer to under 10" times earnings.

5. Conclusion and Key Takeaways

The analysis of Zoom's stock presents a compelling case for a potential turnaround. Technical chart patterns suggest a shift from a prolonged downtrend to a bullish reversal. Fundamentally, the company demonstrates strong enterprise client growth, a robust cash position, and a strategic approach to capital allocation, including a significant share buyback program. Despite historical volatility and a substantial decline from its peak, the improved churn rates and attractive cash-adjusted valuation indicate that Zoom may be emerging from its period of stagnation and is "coming to life."