Zoom Video Communications (ZM) experienced a sharp sell-off this week, erasing a significant portion of its recent gains. The stock dropped nearly 4% on Tuesday and continued to slide in premarket trading, reaching a low of $95—down roughly 15% from its yearly high. The decline followed the company's mixed fiscal second-quarter earnings report, which showed continued growth but offered a softer-than-expected outlook.
Mixed Q2 results
For the quarter ended July 31, Zoom reported revenue of $1.27 billion, up 4.9% year-over-year, with enterprise revenue reaching $788 million. Monthly churn remained steady at 2.9%. However, margins contracted as the company ramped up investments in artificial intelligence. Gross margin fell to 77.2%, and operating margin slipped to 24.6%.
Despite the margin pressure, Zoom highlighted progress in its AI initiatives. Zoom Workplace with AI has attracted millions of users since launch, and Zoom Phone now boasts over 10 million active users. CEO Eric Yuan emphasized the company's focus on embedding AI across its platform to deliver actionable insights and outcomes.
Guidance disappoints
The primary catalyst for the stock's decline was the company's forward guidance. Zoom expects third-quarter revenue between $1.27 billion and $1.28 billion, roughly in line with consensus estimates of $1.27 billion. However, its earnings per share guidance of $1.46 to $1.48 came in below analyst expectations. This suggests that while revenue growth is stabilizing, profitability may face near-term headwinds.
Investors are also concerned about the company's growth trajectory. According to Yahoo Finance, average revenue growth for the next two years is projected at only about 4%. This modest pace may not justify a premium valuation, even though Zoom's forward P/E ratio of 17.3 is well below the tech sector median.
Technical breakdown
From a technical perspective, the stock had been in a strong uptrend since June 25, when it bottomed at $82.21. The rally formed a double-bottom pattern with a neckline at $94.37, and before the earnings release, the stock was consolidating in a bullish pennant. The post-earnings crash invalidated this pattern, signaling a potential further decline.
Analysts suggest the stock may find support at the psychological $90 level. In the longer term, if the sell-off subsides, a rebound toward the $110 resistance is possible. However, near-term sentiment remains cautious as investors await clearer signs of accelerating growth.
For context, the broader market has been focused on Nvidia's upcoming earnings and PCE inflation data, which could influence tech valuations. Zoom's performance also comes amid AI-related concerns affecting other software names.
While Zoom's valuation appears attractive, the company must consistently beat estimates to regain investor confidence. Until then, the stock may remain under pressure.
This article is for informational purposes only and does not constitute financial advice.
