Here’s why the Zoom Video stock is crashing after its earnings report

Zoom Video stock suffered a big reversal this week, ending the recent bull run that pushed it to the highest level in months. It dropped by nearly 4% on Tuesday, and then by 5.7% in the premarket session. It reached a low of $95, down by nearly 15% from its highest point this year. 

Zoom Communications published mixed financial results

Zoom, the popular video communications company, published a mixed earnings report, which showed that its business was still growing despite the rising competition from companies like Google, Microsoft, and Cisco.

The company’s revenue rose by 4.9% in the second June quarter to $1.27 billion, with its enterprise segment hitting $788 million. Its monthly churn remained at 2.9%.

However, the company’s gross and operating margin moved downwards during the quarter as it continued to spend more on AI. The gross margin dropped to 77.2%, while the operating margin moved downwards a bit to 24.6%.

A key bright spot for the company is its investments in AI tools, with Zoom Workplace with AI adding millions of users since its launch. It is also benefiting from Zoom Phone, a product that makes it easy for companies to communicate with clients and partners from around the world. According to its website, Zoom Phone has over 10 million active users. Eric Yuan, the CEO said:

“We are embedding AI across our platform to turn conversational context into action and deliver what customers want: real AI value that produces outcomes. “

READ MORE: Zoom Video stock: Wyckoff Theory points to a 100% surge

Zoom Video stock dropped because its guidance was relatively softer than expected. The company expects that its Q3 revenue will be between $1.27 billion and $1.28 billion. According to Yahoo Finance, the average estimate is that its quarterly revenue will be $1.27 billion. Also, its forward EPS guidance of between $1.46 and $1.48 was lower than expected. 

Still, on the positive side, Zoom is still trading at bargain, with its forward PE ratio being 17.3, much lower than the technology sector median. The stock, however, may remain under pressure until the company demonstrates stronger revenue and profitability growth. 

In this case, it needs to constantly outperform the estimates. Yahoo Finance data shows that the average revene growth for the next two years is about 4%. 

Zoom Video stock price technical analysis

ZM stock chart | Source: TradingView

The daily chart shows that the ZM stock has been in a strong upward trend since June 25 when it bottomed at $82.21. This rebound happened after it formed a double-bottom pattern whose neckline was at $94.37. A double-bottom is one of the most common bullish reversal sign in technical analysis. 

Before the earnings report, the stock was forming a bullish pennant pattern, which is made up of a vertical line and a symmetrical triangle. As such, the crash has invalidated this pattern.

Therefore, the stock will likely remain under pressure in the near term. It may drop further to the psychological level of $90. In the long term, however, the stock may rebound and retest the resistance level of $110 once the post-earnings sell-off ends.