The post-Covid recovery has been anything but positive for Zoom Video Communications (NASDAQ:) stock. 

In 2020, investors excited about the enterprise communications platform’s unexpected tailwind aggressively bid up its shares. The shares traded for $115 each before outbreak and reached $588.84 just prior to COVID-19’s Emergency Use Authorization. Since the start of the vaccine rollout, shares have fallen by more than 52%.

After this decline in price, some may see this as an opportunity to “buy the dip,” ahead of this growth stock making a rebound.

What’s the problem? The problem? Earnings growth will be negligible in the next fiscal.

In turn, a slowdown in the growth rate could lead to a continuation of lower prices. The forward price-to earnings ratio, also known as P/E (or P/E), of the stock is around 57.6x, may not be sustainable.

With the high chances it gets knocked down again due to valuation compression, I am bearish on the stock at today’s prices. (See ZM stock charts on TipRanks)

ZM Stock: Growth Story Slowing

As seen from its most recent quarterly results, Zoom Video may be continuing to grow on a year-over-year basis. For its fiscal second quarter (ending July 31, 2021), sales and earnings were up 54% and 65%, respectively, compared to the prior year’s quarter.

The increase in sales was smaller than expected. Comparatively to the quarter ending April 30, 2021, sales increased by 6.8%. The 40.5% decrease in diluted earnings per share (from $0.74 to $1.04 or 0.74 to 1.04) is not something to be proud of.

Don’t expect this high level of earnings growth to carry on. The sell-side’s average estimate for ZM stock earnings in the current quarter is $1.09 per share. 

Consensus calls for virtually zero growth in earnings during the next fiscal year, which will end January 2023. FY23 earnings estimates average at $4.85 per share are just 1 penny below the FY22 projections of $4.84.

Valuation

Admittedly, it could be shortsighted to write off ZM stock based on the analyst estimates mentioned above. The company beat its projections consistently, so it could continue doing this even though boom times are over.

However, it may be unable to save itself from the worst quarters. Its current multiple of 57.6x could be sustainable if it was still able to grow earnings by 40%-50%, as it’s on track to do this fiscal year compared to last.

If earnings growth falls to an still solid but not as exciting 10%-20% annually? It could also mean that the price of shares drops to 30-40x earnings multiplier, which is comparable to more established tech companies such Microsoft (NASDAQ). The share price would be between $145.20 – $193.60 per unit.

Worse yet, this potential fall in price is assuming that factors like the tapering of the U.S. Federal Reserve’s bond purchase program, and rising bond yields, don’t push overall markets lower.

What Analysts are Saying About ZM Stock

According to TipRanks, ZM stock has a analyst rating consensus of Moderate Buy. There are 18 ratings for ZM stock. 10 give it a Buy rating, 8 rate it Hold, and 1 rate it Sell.

The average ZM price target is $375.85 per share, implying around 33.9% upside from today’s prices. The price targets of analysts range from $304 to $460 per share.

Something Else

There may be something in the near-term that gives ZM a temporary boost: a termination of its proposed deal to acquire rival Five9 (NASDAQ:) in a $14.7-billion all-stock transaction. 

This stock has fallen due to the news of this transaction. This is why? After the close of the transaction, Zoom expected to experience earnings dilution. However, Institutional Shareholder Services, a shareholder advisor, recommended that five nine shareholders vote against this takeover.

Investors may be better waiting for ZM stock’s pandemic-related gains to cease before deciding whether to vote against the larger issue (earnings acceleration).

Disclosure: Thomas Niel didn’t hold any positions in the securities discussed in this article at the time it was published.

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