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The Ratings Game: Zoom Video’s stock gains after Morgan Stanley says buy before earnings

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Shares of Zoom Video Communications Inc. jumped Thursday, while the company’s peers and the broader market stumbled, after Morgan Stanley analyst Meta Marshall turned bullish ahead of earnings, saying investors have just gotten “too negative.”

Marshall raised her rating on Zoom to overweight, after being at equal weight since she started covering the stock in May 2019, a month after it went public. She raised her price target to $400 from $360.

The upgrade and price target hike come just a few days before Zoom is scheduled to report fiscal second-quarter results.

The stock
ZM,
+0.86%

climbed as much as 6.0% early in the session, before paring gains to close up 0.9% at $340.63. Meanwhile, the SPDR S&P Software & Services exchange-traded fund
XSW,
-0.76%

shed 0.8% and the S&P 500 index
SPX,
-0.58%

dropped 0.6%.

Zoom’s stock has lost 40% since closing at a record $568.34 on Oct. 19, 2020, but has bounced 18% since closing at a 2021 low of $288.49 on May 10.

Marshall said investor concerns regarding small- to medium-size business churn are overshadowing the continued growth potential of the enterprise business, particularly as the platform expands.

“Ahead of catalysts in the back half of the year, we feel like valuation has turned too negative on near-term churn concerns,” Marshall wrote in a note to clients. “[W]e think that enterprise momentum, combined with margin headwinds dissipating, creates a positive setup into FQ2.”

Also read: Zoom Video stock shoots up after KeyBanc analyst says it’s time to buy, as the hybrid work state is here to stay.

Zoom has said it will report results for the quarter ending July on Aug. 30, after the closing bell.

The average estimate of analysts surveyed by FactSet is for earnings per share of $1.16, up from 92 cents in the year-ago period, while the revenue consensus is for 49% growth to $991.2 million.

Marshall acknowledged that increased churn from business customers that have fewer than 10 employees is a near-term worry, but not enough to keep her on the sidelines.

“[T]here has been nervousness around recent data pointing to increased churn on the

And the sooner the company starts reducing the percentage of revenue that is from

The FactSet consensus for second-quarter revenue from customers with less than 10 employees is $341.0 million, or 34.4% of the consensus for total revenue.

Regarding the longer-term outlook, Marshall said she believes overall growth will “likely surprise to the upside,” with multiple drivers, including the company’s international business, the larger customer business and the Zoom Phone.

In addition, the recent announcement of the $14.7 billion deal to buy the contact center software company Five9 Inc.
FIVN,
+0.78%

will help Zoom build out a multi-category communication platform, which “can help sustain investor enthusiasm and valuation.”

Zoom’s stock, which rocketed 395.8% in 2020 as a beneficiary of the work-from-home trend brought on by the COVID-19 pandemic, has edged up 1.0% year to date, while the software and services ETF has gained 13.0% and the S&P 500 has advanced 19.0%.

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