One of the clear market winners of the COVID-19 malaise, Zoom Video Communications (ZM) quite literally kept the lights on for the American economy, essentially allowing workers to have their cake and eat it too. With government mandates temporarily locking down non-essential activities, worker bees had to have some way of conducting business. Zoom empowered the concept of remote operations.
However, now that the SARS-CoV-2 virus no longer represents the apocalyptic threat that it once did in the minds of many during the onset of the crisis, the fundamental nature and future relevance of Zoom’s teleconferencing platform has come under serious scrutiny. Indeed, Wall Street has taken a dim view of its prospects, sending ZM stock down 16.5% on Tuesday.
Earlier that morning, the company disclosed its results for the second quarter of its fiscal year 2023. “Zoom reported revenue of $1.1 billion, up 8% year over year -- its fifth consecutive quarter of at least $1 billion in sales. However, the company cited the strengthening dollar as weighing on its revenue growth, causing non-GAAP earnings per share (EPS) of $1.05, down 23%.”
Heading into the disclosure, analysts called for revenue of $1.1 billion and EPS of 94 cents.
Still, the highlight (or rather lowlight) came from forward guidance. “Management lowered its outlook for the full fiscal year, which likely added fuel to today's sell-off. The company now projects revenue of roughly $4.39 billion at the midpoint of its guidance, down from its previous forecast of $4.54 billion. The lower guidance spread to the bottom line as well: Zoom now expects EPS of $3.68 at the midpoint of its guidance, down from its previous forecast of roughly $3.74.”
Still, that didn’t stop ZM stock from attracting some contrarians.
Unusual Options Activity for ZM Stock
When the dust finally settled on the Aug. 23 session, ZM stock became the subject of unusual options activity. Specifically, traders piled into the $85 calls with an expiration of Aug. 26, only three days away from the time of this writing. Volume reached 5,564 contracts against an open interest reading of 124.
A little bit down the order, traders also picked up $90 calls for ZM stock, also with the same Friday expiration date. Here, volume reached 4,644 contracts with open interest of 172.
For the first call, the bid-ask spread as represented by the midpoint price (89 cents) was 2.25%. For the second call, the spread represented by the midpoint price (26 cents) came out to 15.4%. Also, the $85 call featured a delta of 0.27 compared to the $90 call’s delta of 0.094, which is a generally expected circumstance for near or at-the-money options close to expiration.
Though the implications are bullish for ZM stock, the challenge with interpretations here is the short-term nature of the trades. For the record, Barchart.com states (as of the close of Aug. 23) that the put/call open interest ratio for Zoom is 0.78. Given that the common delineation for bullish/bearish implications is 0.70, more traders are buying put options than calls.
Presently, analysts rate ZM stock as a moderate buy, based on seven strong buys, one moderate buy, 12 holds and one strong sell rating.
Questionable Waters Ahead
While teleconferencing solutions will undoubtedly represent a significant component of professional and organizational activities, the magnitude of such relevance remains questionable. In particular, eroding economic conditions suggest that employers are regaining power back from employees.
True, the July jobs report stunned onlookers, adding 528,000 employment opportunities against economists’ forecast of 250,000. At the same time, tech layoffs continue to provide a counterargument to the bullish thesis. With pink slip distributions accelerating, many companies are likely looking to lean out their operations.
Therefore, while corporate employees may believe they have won the stare down against upper management regarding the return-to-the-office debate, over time, money talks and waste matter walks.
Indeed, some workers are starting to wake up to fundamental economic realities. A widely shared social media post offered sage advice. “Now is the time to be visibly value-added — and showing up to the office every day is a big part of that.” Further, a major Wall Street executive weighed in.
“If you want a job, stay remote all the time,” stated Rich Handler, CEO of Jefferies Financial Group (JEF). “If you want a career, engage with the rest of us in the office ... No judgment on which you pick, but don't be surprised or disappointed by certain outcomes.”
Simply put, with more people in the office (in part due to desperation), there will likely be less demand for teleconferencing platforms. On a net basis, that might not be conducive for ZM stock.
Time Considerations
Now, whether betting on ZM stock on the long side is a good idea depends on your time horizon. As a short-term scalping opportunity, I can see Zoom swinging higher temporarily. Typically, a shock low can sometimes generate a dead-cat bounce. Buy in at the right price and you can secure some easy cash (though no guarantees obviously exist).
However, against a longer-term framework, investors ought to err on the side of caution. Probably, Zoom faces a declining addressable market and that’s not a great outlook within an inflationary cycle.
More Stock Market News from Barchart
/An%20image%20of%20a%20Tesla%20humanoid%20robot%20in%20front%20of%20the%20company%20logo%20Around%20the%20World%20Photos%20via%20Shutterstock.jpg)
