We all turned to streaming videos, social media, video games, and other online entertainment. Zoom was in a perfect position to capitalize. Its entire business revolves around video conferencing software, which became incredibly useful for everything from business meetings to online classes to simply hanging out with friends without leaving the house.
Millions of people started using the Zoom app — including tons of big, corporate customers. The company’s revenues exploded. Last year, Zoom raked in over $3.6 billion in sales. That’s up 486% from the year before.
Of course, investors piled into the stock, driving it from around $70 at the start of 2020 to over $550 in October. Not surprisingly, Wall Street got a bit ahead of itself in terms of its expectations. The pandemic helped introduce millions of new users to Zoom’s services. But that 486% revenue growth wasn’t going to continue indefinitely.
So far, 2021 has been a tough year for the stock. The shares are sitting about 50% below their October 2020 highs. Despite the pullback in the stock, Zoom is on track to grow revenue by about 10% this year. Even better, the company is wildly profitable. Earnings have skyrocketed from $7.5 million three years ago to over $672 million last year.
Put simply, Zoom is still on an incredible long-term growth trajectory. The stock is just under pressure because it’s not growing as fast as it was a year ago (which is to be expected, since the lockdowns are over). The stock also got hit as investors rotated away from last year’s “stay-at-home” plays and into stocks that would benefit as economies reopened in 2021.
My Top Ranked analysis, which combines the Big Money trading signals with a strict fundamental screen, weeds out the vast majority of stocks in the market and leaves only the best companies. For a stock to generate a signal on this chart, it needs to rank as one of the top companies in terms of fundamentals (like revenue and earnings growth) while also attracting high-volume buying from institutions.
Zoom made eight buy signals on the Top Ranked Report last year, confirming it’s one of the highest-quality companies you can buy. From a long-term perspective, I think investors will eventually view this year’s pullback as a massive opportunity to scoop up shares of an amazing growth play.
In short, I expect the current pullback to be short-lived as Zoom builds a dominant position in the video conferencing industry over the next few years. Buy Zoom up to $285. We’ll use a 50% stop loss, based on our cost basis.
At the time of this article, I own ZM in my managed accounts