Zoom Video Communications: Growth Concerns Rise

Zoom Video Communications (ZM), the company synonymous with video conferencing, has been one of the ultimate beneficiaries of the COVID-19 pandemic. The company’s revenues quadrupled last year, as the work-from-home economy became the new norm.

Powered by its platform’s fantastic scalability prospects, Zoom also features jaw-dropping margins, resulting in juicy profits as its customer count grows.

While the company’s growth has been rather impressive so far, investors have become increasingly worried about its future growth prospects, which may not be as bright as before.

After all, to expect that the company’s growth pace was to be sustained after the most potent catalyst in video conferencing would be pretty irrational. Shares, as a result, have lost more than half of their value year-over-year. Zoom’s most recent Q3 results further reinforced investors’ concerns, as Zoom’s hyper-growth levels seem to be fading away. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Q3 Results: Losing Pace

Zoom Communications’ Q3 results came in somewhat mixed. Revenues grew by just 35% to $1.05 billion. This implies a significant deceleration from the previous quarter’s 54%, and an even more significant deceleration from Zoom’s peak rates that were north of 300%.

Profitability was once again strong, with net income coming in at $340.3 million, or $1.11 per share, up from $198.4 million, or $0.66 per share in the prior-year period.

However, Zoom guided for Q4 revenues of just $1.05 billion at the midpoint of its outlook, implying a year-over-year growth of just 19.2%, a steeper deceleration going forward.

Customer growth is also an unknown factor in the medium term. The company ended the period with 512,100 customers that employ more than 10 people, only 18% higher compared to last year.


Despite the stock’s prolonged decline, Zoom still trades with a multiple that suggest strong growth ahead.

Based on consensus estimates for revenues of $4.75 billion in FY 2023, the stock trades at 13 times its next year’s potential revenues. Sure, Zoom is a high-margin business which could support a premium on the top line. However, at a forward P/E of 47.8, the stock is also expensive from a net income standpoint.

Wall Street’s Take

Turning to Wall Street, Zoom Video Communications has a Moderate Buy consensus rating, based on 12 Buys and 12 Holds assigned in the past three months. At $310.44, the average Zoom Video Communications price target implies 49% upside potential, nonetheless.


Zoom’s global brand is undoubtedly an invaluable asset. Further, the tailwinds of video conferencing are likely to reaccelerate in the medium to long term, benefiting Zoom.

However, in the short term, it seems like Zoom’s growth is decelerating at a very alarming rate.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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