With the pandemic forcing many people to work from home, the US stock, Zoom Video Communications (NASDAQ:ZM), saw its share price explode in 2020. In fact, it increased by more than 500% between January and November last year. But since then, it has fallen by nearly 40%. What’s causing this decline? And is this an opportunity for my portfolio to buy more at a lower price?
The rising Zoom share price
The initial surge in the Zoom share price started in April last year after the company announced its daily active users had risen by 50% from 200m to 300m in less than three weeks. Lockdown restrictions resulted in many offices being deserted as the majority of employees began working from home. So, the demand for reliable and scalable video communication technology skyrocketed within a matter of days, creating the perfect growth environment for the company.
And by the end of January this year, total revenue in 2020 grew by 325% from $623m to over $2.65bn. Meanwhile, profits surged from $26m to a record-breaking $672m. Needless to say, this level of growth is incredible. So, seeing the Zoom share price take off isn’t a surprise.
But over the past couple of months, the stock has produced some less than impressive returns. And yet, the company continues to report a stellar performance. In its Q1 earnings report for 2021, revenue grew once again by nearly 170% year-on-year. Meanwhile, its total number of customers increased by 354% to over 265,400. And its net dollar expansion rate is still higher than 130% for the eighth consecutive quarter. In other words, the company is getting more customers, while existing ones are increasing their spending.
So why is the stock going down?
The risks that lie ahead
As incredible as this growth has been, there is some uncertainty among investors that it will soon come to an end. And rightfully so, in my opinion. With the vaccine rollouts progressing relatively quickly in the US and UK, many employees will be returning to the office in the near future. Consequently, the need for video conferencing solutions will likely fall. And if its customers suddenly start cancelling their subscriptions, Zoom’s share price may take a substantial hit.
What’s more, due to its impressive growth last year, the business’s market capitalisation increased phenomenally. Even today, after its recent decline, the company is still valued at a P/E ratio of around 130. Generally, a high valuation mixed with uncertainty is not a good combination and exposes investors to a high level of volatility.
The bottom line
Despite the valid concerns surrounding Zoom’s future growth potential in a post-pandemic world, I don’t believe the company will slow down as much as others may think. Many businesses like Facebook have already announced their intentions to continue work-from-home policies even after the pandemic comes to an end.
While I feel the return to the office is inevitable, I don’t believe the need for Zoom’s technology will disappear any time soon. Therefore, I think the company is still capable of continuing its enormous growth over the long term. And so, as an existing shareholder, the falling Zoom share price looks like a buying opportunity for my portfolio.
