On the news of its quarterly report, Zoom Technologies (ZM) stock was unchanged at $327 per share, bringing the market capitalization to $96 billion. In contrast, since mid-May, the company has been in the bullish mode. The gain has been about 12%.
Yet looking at the performance since the IPO – which happened in April 2019 – the return was a sizzling 810%. Of course, a big part of this has been the impact of the Covid-19 pandemic. Companies have had little choice but to adopt videoconferencing to manage remote workforces. Now, it seems like this megatrend is starting to fade. (See Zoom stock analysis on TipRanks)
Zoom’s first quarter results showed revenue growth of 191% to $956.2 million, which beat the Wall Street consensus of $906 million. The company also reported earnings per share of $1.32. This exceeded expectations of 99 cents a share.
As the company has scaled, there has been significant operating leverage. For the past year, the gross margin improved from 69.4% to 73.9% and the cash flows have spiked, going from $295 million to $533.3 million. There is currently about $4.7 billion in the bank.
In terms of the customer base, there was an 87% increase to 497,000 (these numbers refer to companies that have more than ten employees). Nearly 2,000 contributed over $100,000 for the past 12 months, up 160% on a year-over-year basis. The net dollar expansion rate is over 130% (this has been the case for 12 consecutive quarters).
While all this is certainly good news, there is a nagging issue with Zoom: the growth is actually slowing. In the prior quarter, for example, the revenues were up by 369%.
Consider that the fiscal 2022 guidance calls for revenues of $3.975 billion to $3.99 billion, which translates to growth of over 50%. Granted, this is pretty good, but it is still an indication that the hypergrowth story is probably coming to an end.
Wall Street’s Take
Turning to the analyst community, Zoom Technologies stock has 7 Buys, 2 Sells and 8 Holds that have been assigned in the past three months. So, the shares are a Moderate Buy. At $405.63, the average analyst Zoom price target implies 18.9% upside potential.
Bottom Line on Zoom Technologies Stock
It’s true that the company is diversifying its product line. To that end, Zoom is aggressively pushing its phone service, which has added 500,000 to 1.5 million seats for this year. Then there is Zoom Events. Launched in April, this is a system to allow for virtual conferences.
However, these products are still in the early stages and represent a small part of the revenue base. The fact is that it will take time for them to make a difference.
In the meantime, it seems like that there will be less usage of video conferencing. There may even be an increase in the churn rate, such as for school systems that will be going back to live classroom instruction. Will they really need as many licenses? Probably not.
Besides, ZM stock is far from cheap, as it is trading at around 87 times forward earnings. This is definitely steep in light of the decelerating growth rate.
So for now, it could be tough to get sustained strong returns on Zoom stock, especially since it looks like much of the good news is already baked into the valuation.
Disclosure: Tom Taulli does not have a position in Zoom Technologies stock.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.