Why Did Zoom Stock Drop 14% In February? - Nasdaq

What happened

Shares of Zoom Video Communications (NASDAQ: ZM) dropped 14% in February, according to data from S&P Global Market Intelligence. There wasn't any major news about Zoom before its Feb. 28 earnings report, which came out after the market closed. Last month's drop was due entirely to negative market sentiment, especially among high-priced market darlings.

So what

Zoom had two financial press releases last month, and neither was particularly important for the stock's valuation. The company announced the resolution of a legal dispute with RingCentral, then it announced a new product update for contact centers.

Image source: Getty Images.

That news was overall slightly positive. There was no reason to think that Zoom's financial fundamentals had changed meaningfully during the month. Zoom's 14% decline was driven by a falling valuation. It became cheaper relative to sales and expected earnings.

ZM PS and Forward PE Ratio data by YCharts

These dynamics become even more clear when Zoom's price chart is compared to peers RingCentral and Atlassian. All three stocks were clearly influenced by the same market sentiment.

ZM, RNG, TEAM data by YCharts

Now what

Zoom's Feb. 28 earnings report was poorly received by the market, sending the stock lower to start off March. After that, the stock continued to slump as the Ukrainian conflict weighed on markets.

Zoom stock is now 80% below its October 2020 all-time high, despite its ongoing growth. The company's sales grew more than 20% last quarter, and it's got especially strong traction with large customers. That drove free cash flow of more than $1.5 billion for the full year.

Investors are concerned about slowing growth, which is bad news at a time when investors are moving away from riskier assets. Zoom is only forecasting around 10% sales growth this year. The company has retained and built upon its COVID-19 bump, but it's settling into a phase that could never justify its previous valuation. The pricing is much more reasonable now at an 8.4 price-to-sales ratio and a forward price-to-earnings ratio of 32.

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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends Atlassian and Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.