How to Trade Zoom (NASDAQ: ZM) Stock Today

Today we’ll walk you through a trade idea with Zoom Video Communications Inc. (NASDAQ: ZM) that could deliver up to 11% returns in the next 3-6 months.

Zoom Video Communications, Inc. is an American communications technology company headquartered in San Jose, California. It provides videotelephony and online chat services through a cloud-based peer-to-peer software platform and is used for teleconferencing, telecommuting, distance education, and social relations.

Analyst Ratings

According to TipRanks, 21 analysts are offering 12-month price targets for ZM in the last 3 months. 11 analysts rate it a buy, 10 rates it a hold, and none have a sell rating. The average price target offered by these analysts is $391.44, which is a 35.21% upside from current levels.

Why ZM is trending?

Zoom Video Communications Inc. had experienced an extremely fast expansion during the pandemic. However, the stock price dropped to its lowest levels in over three months after the company released its second-quarter earnings report on Aug. 30. amid concerns that the video-conferencing platform’s days of robust growth may be over.

The disappointing guidance tied to the expected loss of more small business customers as the economy normalizes and more in-person meetings resume caused Zoom stock to fall by nearly 17% on Tuesday. ZM’s CFO Kelly Steckelberg noted that the growth would start to “normalize” especially when it is compared to the “unprecedented year-over-year comps.” The financial outlook for next year also seems to be flat.

However, there are also clear tailwinds for the stock. The trend toward distributed workforces is anticipated to continue even after the COVID-19 crisis eventually subsides. Zoom’s technology is helping to enable this global trend, providing efficiency and cost-saving benefits to both employers and employees along the way. The stock could stay relevant for years to come, as the company stands to significantly benefit from the long-term shift to hybrid work.

Morgan Stanley analyst Meta Marshall had also recently raised her rating on Zoom’s shares from equal weight to overweight. Marshall now expects Zoom’s stock price to rise to $400.

Zoom Video also saw its first billion-dollar quarter, with revenue increasing 54% year over year to $1.02 billion and beating estimates by nearly $30 million. Its adjusted net income increased 51% to $415 million, or $1.36 per share, which cleared expectations by $0.20. On a GAAP basis, its net income grew 71% to $317 million.

Zoom had announced on July 18 that it has agreed to buy Five9 (FIVN) in an all-stock deal valued at $14.7 billion. Five9 automates call center services with website chatbots, or virtual assistants. The company’s upcoming Zoomtopia conference in mid-September, when Zoom announces its platform’s latest updates, is also expected to be a positive catalyst.

With strong bull and bear cases happening for ZM, here’s how to trade the video conferencing software company.

ZM Chart

On analysis, there are mixed indications on the daily chart of ZM.

#1 MACD Below Signal Line: The chart shows that the MACD (light blue color) has currently crossed below the MACD signal line (orange color). This typically indicates a bearish setup.

#2 Below MAs: The stock is currently below both 50-day as well as 200-day SMA, indicating that the bears have currently gained control.

#3 Oversold RSI: The RSI is currently near oversold levels, indicating that a reversal may be imminent.

#4 Bearish Stoch: The %K line is below the %D line of the stochastic. However, the stochastic is also near oversold levels, pointing to the possibility of an upcoming reversal.

Below is the bullish and bearish play for ZM.

Recommended Bullish Trade (based on the chart)

Buy Levels: If you want to get in on this trade, the buy level for ZM is in two scenarios. These are marked as green color dotted lines in the daily chart.

• Buy Level #1: You can purchase the shares of ZM above the price of $351.00.
• Buy Level #2: You can purchase the shares of ZM above the price of $413.00.

Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.

TP: Our target prices for various buy levels are as follows

• The target prices for Buy Level #1 ($351.00) are $370 and $390 in the next 3 to 6 months.
• The target prices for Buy Level #2 ($413.00) are $430 and $450 in the next 3 to 6 months.

SL: To limit risk, place a stop loss at the following levels.

• The stop loss for Buy Level #1 ($351.00) is $340.00.
• The stop loss for Buy Level #2 ($413.00) is $402.00.

Note that the stop loss is on a closing basis.

Target Upside: Our target potential upside is 4% to 11% in the next 3-6 months.

• Entry at Buy Level #1 ($351.00): For a risk of $11.00, our first target reward is $19.00 and the second target reward is $39.00. This is a nearly 1:2 and 1:4 risk-reward trade.
• Entry at Buy Level #2 ($413.00): For a risk of $11.00, our first target reward is $17.00 and the second target reward is $37.00. This is a nearly 1:2 and 1:3 risk-reward trade.

In other words, this trade offers 2x to 4x more potential upside than downside.

Risks to Consider: The stock may reverse its overall trend if it breaks down from the near-term support level with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.

Recommended Bearish Trade (based on the chart)

In case the stock breaks down from the near-term support level with high volume, it would point to an upcoming short-term correction. In that case, below are the entry level, stop loss level, and target prices.

Sell Level: You can take short positions on ZM below the price of around $282.00. This sell level is marked as a red color dotted line in the chart.

Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.

TP: Our target prices are $265 and $250 in the next 3-6 months.

SL: To limit risk, place a stop loss at $291.00. Note that this stop loss is on a closing basis.

Our target potential downside is 6% to 11% in the next 3-6 months.

For a risk of $9.00, our first target reward is $17.00 and the second target reward is $32.00. This is a nearly 1:2 and 1:4 risk-reward trade.

In other words, this trade offers nearly 2x to 4x rewards compared to the risks.

Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.

Happy Trading!

— Trades of the Day Research Team

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