By CCN.com: Despite experiencing its first bearish pause early Monday, Zoom’s stock rebounded and continued the rally. The stock initially dipped 2.8% Monday after spiking more than 72% on Thursday in Zoom’s Nasdaq debut. It’s clear Zoom’s stock remains widely in demand, driven by a combination of unusual profitability and proximity to similarly high-profile tech IPOs such as Pinterest and Lyft. At least one Wall Street analyst, however, believes it’s only a matter of time before investors cool to Zoom’s stock.
Following the slight decline, Zoom’s stock immediately pared the losses, regaining upward momentum. Wall Street continues its unexpected love affair with a previously low-profile video technology startup. Amid the positive atmosphere though, there are signs that the honeymoon period may not last much longer.
Many founders would be happy to accept plaudits upon seeing shares shoot up 76% within hours of launching in the public markets. Zoom CEO Eric Yuan, however, was humble (and honest) enough to admit that he had “no idea” why Wall Street responded so positively to Zoom stock. The hugely successful IPO closed with Zoom’s share price at $62, having raised nearly $350 million for the video startup.
As it turns out, Wall Street investors are used to tech startups prioritizing user numbers and growth over balance sheet and profitability. The problem they face is how to differentiate great startups with profitability potential from those that will merely eat up marketing and user acquisition dollars without delivering any returns. CCN.com reported recently that investors gave the red card to Lyft’s disastrous IPO for this exact reason.
According to Robert Johnson, professor of finance at Creighton University’s Heider College of Business, Lyft’s IPO failed because after working through the hype, investors realized that the company’s path to profitability is unclear. Zoom, however, turned that status quo on its head, giving investors the option of investing in a startup that was already profitable at the IPO.
Zoom generated a profit of $7.6 million on total revenue of $330.5 million in its 2019 fiscal year.
Despite the positive vibe around Zoom, Wall Street doesn’t expect the good times to last forever. According to Jonathan Kess, Wall Street analyst at Summit Redstone Partners, Zoom’s likely challenge comes from the expectation that its rapid sales growth will eventually fall drastically. In that case, Zoom’s market sentiment-driven share price can only hold out for so long.
Kess is cited in Bloomberg as saying:
“Market trends, hyper competition, and a limited moat make for exceptional and more challenges ahead than strengths.”
Kess suggests that Zoom stock’s performance is hardly anything more than a temporary stock market “frenzy”. His recommendation leans slightly toward “sell” for the time being.
Zoom’s Eric Yuan insists that the IPO was only a means to an end, and the company will now focus on aggressive growth and expansion. He believes Zoom is going to “triple down” on its growth efforts, which signals massive upcoming expenditures on marketing and user acquisition. From a balance sheet point of view, that means that cost centers will grow, which could lead to the company swinging to a loss.