Zoom Video Communications (ZM) is one of the most interesting stocks whose shares have plummeted during the ongoing tech sell-off. The company synonymous with video conferencing was boosted massively by the tailwinds created by the COVID-19 pandemic.
As demand for video conferencing software skyrocketed over the past couple of years, Zoom saw its revenues quadruple in 2020 alone.
Driven by its platform’s excellent scalability prospects, Zoom has managed to achieve jaw-dropping margins, leading to a hefty bottom line as its customer count keeps expanding.
While the company’s growth was quite impressive in 2020 and 2021, investors have become increasingly concerned about Zoom’s future expansion capabilities prospects, due to signs of a slowdown.
This has led to the stock treading lower since last October continuously. From its 52-week highs of $440 in October, Zoom shares have drifted at around $122 as of writing this article.
The company’s results further strengthened investors’ worries, as Zoom’s previously hyper-growth levels are gradually shrinking. Therefore, the sell-off may endure.
That said, the stock is becoming increasingly more inexpensive based on its ongoing profitability prospects. Overall, I am neutral on Zoom.
Q4 Results: What to Expect
Zoom’s Q4 results will be released in the next few days. In its Q3 results, Zoom guided for Q4 revenues of just $1.05 billion at the midpoint of management’s guidance.
This implies year-over-year growth of only 19.2% and steep deceleration from Q3’s revenue growth of 35% to $1.05 billion. For context, at the peak of Zoom’s popularity during the midst of the pandemic, Zoom’s revenues were growing north of 300% year-over-year.
I think that the company itself knows that its growth prospects ahead will be limited and certainly softer than those of the past few years. Consequently, management will likely focus on profitability maximization, through which the company’s high-margin business model can shine.
In the previous quarter, net income came in at $340.3 million, or $1.11 per share, significantly higher from $198.4 million, or $0.66 per share in the comparable period last year.
Assuming relatively constant margins, based on its Q4 revenue outlook, the company should be able to achieve quarterly EPS of around $1.10 and hence close the year with FY 2021 EPS close to $4.90.
Valuation
The stock’s prolonged decline and Zoom’s growing profits have resulted in an attractive valuation multiple. Assuming FY 2021 EPS of $4.90, the stock trades at 24.9 times earnings.
This is not an expensive multiple considering that Zoom is likely to grow its earnings in the single to low-double digits over the next few years based on its current momentum.
Wall Street’s Take
Turning to Wall Street, Zoom Video Communications has a Moderate Buy consensus rating, based on seven Buys, four Holds, and one Sell assigned in the past three months. At $207.08, the average Zoom Video Communications price target implies 69.2% upside potential.
Conclusion
Zoom’s growth seems to be decelerating, and the company’s upcoming results should show rather softened revenue growth. However, shares have declined enough that Zoom could be relatively cheaply valued based on its underlying net income.
Nevertheless, I believe that the stock’s investment case remains speculative at its current phase. Hence, I am neutral on Zoom stock.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
