‘Market expectations from a valuation perspective have gotten ahead of themselves’
Zoom Video Communications Inc.’s stock was among tech’s biggest losers in Monday trading, following a downgrade at Goldman Sachs.
Though Goldman Sachs analyst Heather Bellini sees plenty of upside ahead in her “blue sky” scenario, she argued that the current share price already has the potential for positive surprises given that “market expectations from a valuation perspective have gotten ahead of themselves.”
Bellini lowered her rating on Zoom’s stock ZM, -2.17% to sell from neutral on Monday, while raising her price target to $66 from $53.
The shares were down more than 3% in morning trading, though they remained up more than 130% from the company’s initial-public-offering price of $36.
Bellini’s “blue sky” scenario, an especially rosy forecast, leaves room for Zoom to massively exceed Wall Street’s consensus revenue forecast of $721 by as much as 64% for calendar 2020, but she worries about Zoom’s soaring multiple. The stock currently trades at about 21 times enterprise value to Bellini’s “blue sky” estimates for calendar 2020 revenues, the highest such multiple among the 14 software stocks in her coverage universe. The average is about 11 times.
In order for Bellini to become more upbeat on the stock, she would be looking for a pullback in the stock price or revenue opportunities for the next few years that were “materially” above her current “blue sky” estimates. “This potential upside could come from a strong uptake of Zoom Phone or an even faster ramp in enterprise customers, which would suggest the durability of growth would continue at a higher rate for longer than we are anticipating,” she wrote.
Zoom shares have gained 7.5% over the past month, as the S&P 500 SPX, +0.77% has risen 7.8%.