Following positive news related to the development and deployment of coronavirus vaccines, Zoom’s (ZM) stock fell sharply. While the demand for the company’s services is not expected to decline anytime soon—because the remote working and learning trends adopted during the pandemic may continue indefinitely—growing competition might nevertheless limit the stock’s upside in the coming months.

Amid the COVID-19 pandemic, Zoom Video Communications, Inc. (ZM) became one of the most popular companies. It provides a video-first communication platform and web conferencing services. The stock skyrocketed during the pandemic as companies shifted rapidly to a virtual structure. Even educational classes were (and are) being held remotely using the Zoom platform.

However, with the progress on the coronavirus vaccine front, the stock took on investors’ a hit on investors anticipation of a decline in demand for the company’s services with a gradual re-opening of the economy. The stock has declined 29.3% since hitting its 52-week high in October. Also, with many tech leaders now launching similar services, the company is facing stiff competition.

So, it might be difficult for Zoom to maintain its lead in the videoconferencing space in the months ahead. Lack of investor optimism and a potential downside based on several other factors have made our proprietary system rate ZM as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates ZM:

Trade Grade: F

ZM is currently trading slightly above its 200-day moving average of $359.82, but below its 50-day moving average of $426.73. The stock’s 2.8% loss over the past three months reflects short-term bearishness.

The company’s revenue has increased 366.5% year-over-year to $777.2 million for the quarter ended October 31, 2020. While non-GAAP net income increased 1079.4% year-over-year to $297.2 million, non-GAAP EPS increased 1000% year-over-year to $0.99. Its customers with more than 10 employees have increased roughly 485% year-over-year to 433,700.

ZM announced on December 15 that it will expand its presence in Singapore by opening a new Research and Development Center. In November, the company was named as a leader in the 2020 Magic Quadrant for Meeting Solutions by Gartner. ZM and Lumen Technologies Inc. (LUMN) partnered in September to deliver clients an enhanced experience. However, the stock fell sharply following the positive news of the coronavirus vaccine because of investors skepticism about the future of the company as the world economy eventually re-opens.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, ZM is positioned unfavorably. The stock is currently trading 31.8% below its 52-week high of $588.84, which it hit on October 19.

The company received a massive boost from the pandemic. However, ZM has been facing severe competition from established tech companies.

Peer Grade: D

ZM is currently ranked #37 of 57 stocks in the Technology - Services industry. Other popular stocks in the technology-services group are TTEC Holdings, Inc. (TTEC), PagerDuty, Inc. (PD), and Dropbox, Inc. (DBX).

ZM has comfortably beaten the returns of these industry participants over the past year. TTEC, PD, and DBX have gained 116.4%, 85.4% and 39.2%, respectively, over the same period.

Industry Rank: D

The Technology - Services industry is ranked #109 of the 123 StockNews.com industries. The companies in this industry provide a variety of services to businesses worldwide, namely to resellers, retailers, and original equipment manufacturers, distributing information technology (IT) products, and providing supply chain and mobile device lifecycle services.

With a successful start to the coronavirus vaccine distribution, this industry received a blow. Investors are rotating out of tech stocks and increasingly focusing on sectors that are expected to flourish once the economy recovers.

Overall POWR Rating: D (Sell)

Overall, ZM is rated a “Sell” due to lack of analyst confidence, rising competition, and weak price momentum, as determined by the four components of our overall POWR Rating.

Bottom Line

ZM is expected to decline further because vaccine distribution is off to a successful start. Moreover, as the company faces stiff competition, it might not be a good idea to bet on the stock unless the company is able to diversify its portfolio or roll out new strategies.

ZM has an average broker rating of 1.71, reflecting bearish analyst sentiment. Out of 23 Wall Street analysts that rated the stock, only 6 rated it “Strong Buy.” Its EPS is expected to grow at just 3.1% in 2022.