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Is Zoom (ZM) a Buy Under $300?

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Headquartered in San Jose, CA, Zoom Video Communications, Inc. (ZM) is a video teleconferencing software company that enables users to hold virtual meetings, chat among peers, make phone calls and host online events, such as webinars.

After reporting Q2 earnings on August 30th, 2021, shares of ZM plunged more than 15%. This was in spite of the fact that the company announced a higher-than-expected earnings forecast for the full year. 

Today, I’ll analyze the company’s fundamentals, and take a look at the options market related to ZM, to determine whether this dip is a buying opportunity. 

Recent Developments 

On July 16th, Zoom announced its plans to pay $14.7 billion to acquire Five9, a leading provider of cloud-based contact center software. Under the terms of the deal, Five9 stockholders will receive 0.5533 shares of Zoom Video Communications for every Five9 share. However, after the recent pullback of ZM’s share price, the acquisition price represents only a moderate premium, thus Five9 shareholders may reject this deal. Needham analyst Scott Berg said that Zoom should reconsider details of the offer or add cash to satisfy Five9 shareholders. 

Recent Financial Results

Zoom Video Communications’ revenues for its fiscal second quarter of 2022, ended July 31, 2021, increased 53.7% year-over-year to $1.02 billion, beating Wall Street estimates by $29.73 million. This increase was primarily driven by revenue growth from subscription services provided to new customers. 

In Q2, ZM’s net income came in at $317 million, up about 70% from the prior-year period. As a result, its GAAP EPS increased 65% from its year-ago value to $1.04, beating analysts’ expectations by $0.24. Also, the company’s free cash flow has been reported at $455 million, representing a 22% year-over-year increase.

The company’s EPS for the third quarter of fiscal year 2022 is expected to increase by about 10% year-over-year, standing at $1.09. Also, ZM was able to surpass consensus EPS estimates in each of the trailing four quarters. The company’s sales for the next quarter are projected to lift 31.27% year-over-year to $1.02 billion.

The analysts’ current year average EPS estimate of $4.84 indicates a Forward P/E ratio of around 61.3x, which is higher than the sector median of 25.16x. Also, ZM’s forward P/S and EV/EBITDA stand at 21.88x and 52.20x, respectively. These ratios are also above the sector benchmark of 4.14x and 16.44x, respectively.

How much volatility are options traders expect for the stock? 

Let’s move on to the quantitative part of our analysis. Looking at the October 15th, 2021 option chain, we can determine the expected price movement utilizing the long straddle options strategy. With that being said, my calculations imply that ZM stock could rise or fall by about 10% by the expiration date from the $300.00 strike price. Let’s also turn our attention to the number of open calls and put contracts as well. The number of open calls at the $300.00 strike price outweighs the open puts by around 8%. Currently, there are 8,036 calls to 7,488 open puts. 

Options Traders Betting On A Rise

During the September 8th trading session, there was a purchase of about 7,951 $300.00 October 15 call options for $11.70 per contract. As a result, this transaction brings the total number of open contracts to 8,036 (source: barchart.com). This means that the bet has a total dollar value of about $9.3 million. So, I would characterize this transaction as a massive bullish bet. At closing yesterday’s trading session, the stock was priced at $295.86. This means that if the stock can reach its strike price, it would have an upside potential of about 5.3% from its current levels. If a buyer of the options is planning to hold the options until they expire, they’d need a price of $311.70 to earn a profit, if we are not including costs and broker commissions.

Conclusion

After ZM reported second-quarter earnings the stock sold off due to its slowing growth versus the previous quarter.  However, I believe this to be a buying opportunity.  The company is still projecting double-digit growth and is making tactical acquisitions that will position it for even more growth in the long-term.

In addition, options traders are also betting on the stock’s rise in the following weeks following the sell-off.  Furthermore, Cathie Wood’s ARK Invest scooped up Zoom shares on the dip.

Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. Oleksandr focuses his trade strategy around "special situations" (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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