Credit Suisse says now's the time to sell Zoom following its coronavirus-driven 135% spike
- Zoom has gained 135% through March 23 as the coronavirus pandemic brought millions of users to its platform.
- On Monday, Credit Suisse downgraded Zoom to "underperform," the equivalent of a sell rating.
- Shares of Zoom fell as much as 9% Monday morning.
- "While implied new customer growth may seem undemanding compared to recently disclosed 20x participant growth, we expect much of the recent surge to be ephemeral, and/or comes from free users or education, which are very difficult to monetize," Credit Suisse said.
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Zoom has been on a wild ride amid the coronavirus pandemic that's forced millions to work from home to curb the spread of disease. According to Credit Suisse, now is the time to offload the stock to capitalize on the company's gains.
Credit Suisse on Monday lowered its rating on Zoom to "underperform," the equivalent of sell, citing increased competition and the company's sky-high valuation. Shares of the company slipped as much as 9% Monday morning while the broader market gained.
"We commend Zoom for being a superhero of the current health crisis," a group of analysts led by Brad Zelnick wrote Monday, "though our responsibility as equity analysts compels us to distinguish great companies from great stocks."
Zoom surged 135% to an all-time high close of $159.56 on March 23, boosted by the coronavirus pandemic and increased calls for social-distancing measures - the company said its paid and free usership has boomed to 200 million now from 10 million last year.
It's not been without trials however - the stock has fallen about 29% amid concerns over cyber-security and harassment on the platform.
The downgrade centers on Zoom's "ultra-premium valuation," which is the richest in software, trading at roughly 40 times its enterprise value, according to the note.
"While implied new customer growth may seem undemanding compared to recently disclosed 20x participant growth, we expect much of the recent surge to be ephemeral, and/or comes from free users or education, which are very difficult to monetize," Zelnick said.
In addition, while Zoom is definitely benefiting from having the "the best product at the right time," the bank says that the overall video-conferencing sector remains competitive. Longer term, Credit Suisse thinks that Microsoft Teams, a competing video conference product, will be the most significant threat.
Credit Suisse also sees that Zoom's security problems have led some high profile users to leave the platform, signaling low switching costs. The bank raised its target price for Zoom to $150 from $95, driven by a discounted cash flow analysis giving a higher probability to its upside scenario for the platform.
Zoom is up 88% year-to-date through Friday's close.
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