Zoom: Still in a High Growth Phase

The share price of Zoom Video Communications (ZM) skyrocketed in fiscal year (FY) 2021 but has plunged 45.5% in FY 2022. The stock is underperforming the S&P 500, which gained 26.9% over the same period. This correction is expected, as the demand for virtual conferencing has declined with an improving economy. Although revenues cannot be expected to accelerate at the same pace of 325.8% as in FY 2021, the company is still in a high-growth phase.

Zoom is one of the leading enterprise video communication providers. Its cloud platform allows video and audio conferencing, chat, and webinars across mobile, desktop, and room systems.

The stock is trading near its 52-week low. This dip has presented long-term investment opportunity. Given the ease, flexibility, and quality of Zoom videoconferencing, it could be one of the preferred consumer choices. I am bullish on the stock as the company has been delivering strong quarterly results and is taking several initiatives to maintain its position.

Increased Demand for Virtual Collaboration

According to a survey conducted by PWC, 83% of employers note that the shift to remote work has been successful for their company. Nearly 70% of executives plan to step-up spending on virtual collaboration tools, post-pandemic. Also, over half of employees want to work remotely three days a week or more, meaning work interactions will be more virtual.

Enhancing Video-conferencing App

As more competitors are entering the video conferencing market, Zoom management plans to further improve the App by integrating several other features to bring enhanced customer experience. Some of these initiatives include end-to-end encryption, video voicemail, enhanced whiteboard with VR functionality, live translation and transcription, interactive maps and authentication, huddle room and widgets, and many more.

Zoom Events

In an effort to differentiate itself from competitors, the company launched Zoom Events in September 2021. The platform provides more real-time experience in a virtual environment. It allows the host to organize multi-track events on multiple days, and is one of the best platforms for virtual, live, and hybrid events on Zoom. The platform has multiple functionalities, including event lobby, chat, networking, sponsors, surveys, recordings, and analytics.

Zoom Phone – Potential Growth Driver  

Another innovation is Zoom Phone, which was launched in 2019. It is a cloud telephony solution that is reliable and cost effective. It offers more than 400 other features, including phone, chat, video conferencing on cloud. The platform can also integrate with other business applications, including Salesforce, Google Workspace, Slack, and Microsoft Teams.

Annual operational cost per Zoom phone license is estimated at $525 . This is much lower compared with the industry average of $1,196. Most companies surveyed also found it superior for enabling a remote workforce.

Additionally, Zoom Phone has become a leader in the Gartner UCaaS Magic Quadrant, in fewer than three years from its launch in 2019. It has already expanded to over 40 countries and sold over 2 million seats, up from 500,000 reported at the end of 2020. Zoom Phone replaces traditional business PBX phone systems and competes with products from Cisco, Avaya and RingCentral.

Other Strategic Initiatives

Other initiatives include investment in technology companies. ZM invested in Cvnet, a leading provider of enterprise event technology and American Express Global Business Travel (GBT), a leading B2B travel platform, to further enhance its video conferencing features.

It also invested in Liminal, which offers event production solutions built on Zoom’s SDK. The software can connect multiple HD video feeds from Zoom to production-grade hardware and applications. This should solidify its hybrid events management platform.

Raised Operating Margin Target

In a move to improve profit margins, the company is launching Video Engagement Center, a cloud-based contact center solution in 2022. Management expects this initiative to improve long-term operating margin to 25%, from 20%.

Strong Quarterly Results

The company has been delivering better-than-expected quarterly results consistently over the past two years. In the Q3 2022, non-GAAP earnings of $1.11 per share surpassed consensus estimates by $0.02 per share. Earnings were 12.1% higher than $0.99 recorded in Q3 2021.

Revenues increased by an impressive 35% to $1.05 billion, led by a strong performance across geographies, Americas (+30%), Asia Pacific (+45.4%), and EMEA (+48.1%). Particularly, the company’s ability to add large customers have attributed to superior results.

Expanding Customer Base

There were 2,507 customers contributing to over $100,000 in trailing 12-month revenues, up 94% from the prior year;s quarter. Also, clients with more than 10 employees increased 18% to 512,100 customers in Q3 2022. Going forward, ZM should expect to continued growth momentum.

Net dollar-expansion rate for customers with more than 10 employees was more than 130% for the 14th consecutive quarter. Management’s ability to sustain higher net dollar rate for a long time is impressive. It also indicates a lower customer attrition rate.

Healthy Balance Sheet

The company ended the quarter with $5.4 billion in cash and marketable securities and zero debt. Higher cash flows give confidence in management ability to carry out its growth plans.

Optimistic Guidance

Management expects revenues in the range of $4.079 billion to $4.081 billion, up 54% year-over-year. Non-GAAP earnings are estimated between $4.84-$4.85 per share, up from $2.25 per share recorded in FY 2021.

Wall Street’s Take

Turning to Wall Street, ZM has a Moderate Buy consensus rating, based on 11 Buys, 13 Holds and one Sell ratings assigned in the past three months. The average ZM price target of $295.71 implies 72.3% upside potential.

Investment Conclusion

ZM shares have already been beaten down, despite the possibility of lock downs posed by Omicron variant of COVID 19. The shares are currently trading at its 52-week low of $171.60, far from its peak of $451.77 achieved in February 2021.

The company’s ability to maintain strong growth on the back of its expanding customer base and high net dollar-expansion rate reflects a positive outlook. Furthermore, the company’s innovation of cloud-based Zoom Phone could be a major market disruptor. With management’s proven capabilities and several launches planned in 2022, it is well positioned to become an indispensable platform for communication.

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Disclosure: At the time of publication Sakshi Agarwalla did not have a position in any of the securities mentioned in this article.