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Here's When Zoom Video Becomes a Buy

Zoom Video has been trending lower for months now. Will it soon become a buy?

In a year that was so tough for so many, it seems backward to call Zoom Video  (ZM) - Get Zoom Video Communications Inc. Report a winner.

But when it comes to the stock price, that’s exactly what Zoom Video was. Shares surged hundreds of percent during the year as investors piled into the stock.

As a result of the coronavirus pandemic, businesses and consumers alike flocked to the video platform, driving revenue and profit through the roof.

The nice thing about Zoom Video? It was already a great business before Covid-19 came along. The pandemic simply accelerated demand.

Even with estimates calling for more than 300% revenue growth this year, analysts still expect another strong year of growth for Zoom in the coming year, with growth estimates at 38%.

Despite that, the stock has sagged considerably. Let’s look at the chart to see if there’s an opportunity.

Trading Zoom Video

Daily chart of Zoom Video stock.

Daily chart of Zoom Video stock.

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In September, Zoom’s better-than-expected earnings coincided with a sharp market-wide decline, knocking the stock lower by 27.5% in just four days.

However, it went on to rally to new highs, topping in October. From that October high near $589 to Tuesday’s low near $331, shares have fallen more than 40%.

As a rule of thumb, once a high-flying, high-quality business sees its stock fall more than 40% I begin keeping a close eye on it.

With Zoom, I’d love one more low. Specifically, I’d love for a move down to the $315 to $325 level. There it will find the 200-day moving average and that gap-fill from the early September earnings surge we discussed at the top of this section.

Shares would be down about 45% in this area and for the quality company that this is - although still expensive based on valuation - I think bulls would at least have a reasonable risk-reward buying opportunity.

Tuesday’s mellow price action comes after the company announced it will raise $1.5 billion in cash. Premarket traders briefly had an opportunity below $320, but that opportunity did not materialize during regular trading hours.

From here, let’s see if and when we get that buying opportunity. If not, look to see if Zoom Video can rotate back over the prior week’s high and the 21-day moving average.