Why Return to Work Could Be a Killer for Zoom Video Communications (ZM)

In perhaps most cases, a publicly traded company delivering a solid earnings beat typically translates to higher equity valuations. However, the market represents a forward-looking platform, which ultimately may have cost teleconferencing specialist Zoom Video Communications (ZM). With the broader business ecosystem becoming more unfavorable for the company, many investors decided to hit the exits on ZM stock.

On paper, the net result – a loss of nearly 4% in the charts for the Tuesday session – doesn’t seem fair within the strict contextual confines of the third quarter. Here, Zoom delivered adjusted quarterly earnings of $1.07 per share, beating the consensus target of 84 cents per share. While this slipped a bit from the year-ago tally’s earnings of $1.11 per share, the company also endured unprecedented macroeconomic obstacles in 2022.

On the revenue front, Zoom generated $1.1 billion on the top line, edging past Wall Street’s forecast by 0.41%. Still, this sales haul compared favorably to Q3 2021’s result of $1.05 billion. During the last four quarters, Zoom topped consensus for sales three times while doing the same for earnings four times.

Despite the positive performances, they did nothing to arrest the negative trajectory of ZM stock. In the trailing five days, Zoom shares fell almost 9% while in the trailing month, they’re down over 4%. On a year-to-date basis, ZM failed to capture the magic of the first two years of the pandemic-related new normal, dropping 58% of equity value.

The common explanation for the post-Q3 disappointment centers on guidance. “Management sees no sequential sales growth at all in Q4 -- about $1.1 billion again. This would work out to less than 3% sales growth year over year and fall a bit below Wall Street's expectations. Full-year sales -- expected to be below $4.4 billion -- will also fall short,” according to the Motley Fool.

Traders and Analysts Penalize ZM Stock

Not surprisingly, ZM stock represented one of the many spotlights for unusual options activity following the close of the Nov. 22 session. To be fair, not everybody is bearish on Zoom Video. However, transactions such as the $135 puts with an expiration date of Jan. 20, 2023, provide some food for thought. In this case, the ratio between volume and open interest hit 10.63.

Currently, the sentiment in the options market for ZM stock runs slightly bullish. Per data from Barchart.com, the put/call open interest ratio at time of writing stands at 0.65. Usually, the separation point between optimism and pessimism is 0.70, with figures below this level indicating that more traders are buying calls than puts. However, other data suggests that this framework may change for the negative.

For one thing, Barchart’s technical analysis indicator rates ZM stock as a “72% sell.” Worryingly, both nearer-term and longer-term moving average indicators equally suggest that investors should dump Zoom shares.

Second, the company suffers from weak analyst assessments. Three months ago, Wall Street experts rated ZM stock as a consensus “moderate buy” but only barely. At the time, this rating broke down to seven strong buys, one moderate buy, 12 holds and one strong sell.

In the current month, the consensus rating is “hold.” This breaks down to six strong buys, one moderate buy, 14 holds and two strong sells. Keep in mind that a hold rating represents a diplomatic way for analysts to state that they don’t like the underlying investment. Per the Wall Street Journal, very few analysts rate shares as a definitive sell.

A Return to the Office Could Hurt Zoom

While the poor guidance reflects the technical reason why ZM stock fell, the fundamental catalyst for the disappointment could be the potential return of normalization of the workplace. In other words, as employers demand that their employees return to the office, teleconferencing platforms may lose their relevancies.

To be clear, multiple reports indicate that businesses can save money through video conferencing platforms. However, this is usually in the context of replacing travel expenses with digital alternatives. As a permanent alternative to regular working environments, though, video conferencing can actually cost money.

Indeed, video conferencing opens myriad risks for miscommunication and in turn, miscommunication costs enterprises, usually in the form of lack of productivity. One study suggests that this hidden headwind costs businesses $4,000 to $6,000 per employee each year. Another study revealed that for enterprises with 100,000 or more employees, poor communication can cost a staggering $37 billion.

You know the easy solution for this expensive pitfall? Companies bringing back their workers to the office. And that may signal severe turbulence for ZM stock.

• Pre-Market Brief: Stocks Climb Ahead of FOMC Meeting Minutes
• Is Hasbro a Buy Now That It’s Selling eOne?
• Stocks Rally on Positive Corporate Earnings and Lower Bond Yields
• Diesel Shortage Threatens to Boost Global Inflation and Undercut Growth