Zoom Video vs. Cisco: Which Communications Stock to Choose?

The COVID-19 pandemic and the subsequent restrictions saw people working from home extensively. This trend resulted in an uptick in use of work management, networking and connectivity tools that could help employees stay connected and work from anywhere.

Let us compare two such companies, Zoom Video Communications and Cisco, using the TipRanks stock comparison tool. These companies rode high during the pandemic, but as the pandemic restrictions have evolved, are they still as successful or facing a different set of challenges? We will also look at how Wall Street analysts feel about these stocks.

Zoom Video Communications (ZM)

Investors seemed to be disappointed with Zoom’s fiscal Q3 results, as the stock tanked 14.7% in yesterday’s trading. This is even after the video communications company posted revenues of $1.05 billion, indicating growth of 35% year-over-year, and beating Street estimates of $1.02 billion.

But investors seemed to be more concerned about the slowing revenue growth rate for ZM, indicated by the fact that in the same quarter last year, the company’s revenues went up by a whopping 367% year-over-year.

It is important to note here that Zoom primarily generates revenues through subscriptions to its communications platform. The company sells its communications products through direct and channel sales.

Kelly Steckelberg, Zoom Video Communications’ CFO, stated on its earnings call that in Q4, ZM expects that while “direct and channel business will continue to grow…our online business will be a headwind in the coming quarters as smaller customers and consumers adapt to the evolving environment.”

BTIG analyst Matt VanVliet is also of the opinion that a major catalyst for the stock would be whether ZM can “continue to monetize these users with new paid accounts during the pandemic and in the ‘new normal.'”

However, these concerns aside, the analyst continues to remain upbeat about the stock. VanVliet listed other positives for the stock, including solid customer metrics that drove strong margins and growth in Zoom Phone. (See Top Smart Score Stocks on TipRanks)

At the end of Q3, ZM had 2,507 customers who generated revenues of more than $100,000 in the trailing 12 months, and these customers made up 22% of the company’s revenues.

The company’s management stated on its earnings call that in the third quarter, “customers with more than 10 employees represented 66% of revenue” suggesting that “customers with more than 10 employees are expanding their use of our platform, adding more products and seats, aligned with our go-to-market strategy.”

Zoom is seeing increasing traction for Zoom Phones, which had “year-over-year revenue growth in the triple digits and reached 30 customers with over 10,000 paid seats.” Zoom Phone is a cloud-based phone system that allows customers to replace their business telephone systems.

Analyst VanVliet is bullish about the prospects of both Zoom Phone and its Video Engagement Center (VEC), which is expected to be available early in 2022. Additionally, the analyst perceives the international market as another possible growth driver for the company over the long-term.

Currently, according to VanVliet, “only about 30% of TTM [trailing twelve months] revenue comes from outside the U.S.”

As a result, the analyst has a Buy rating on ZM but lowered the price target from $460 to $400 (93.6% upside) on the stock, following the Q3 earnings, “to better reflect current market sentiment and group multiple compression.”

The rest of the analysts on Wall Street are cautiously optimistic about Zoom Video, with a Moderate Buy consensus rating based on 11 Buys and 12 Holds. The average ZM price target of $311.29 implies 50.6% upside potential to current levels.

Cisco Systems (CSCO)

Cisco offers a broad range of products and technologies that “power the Internet.” The company mainly competes with Zoom through its Cisco Webex, a subscription-based conferencing platform.

In fiscal Q1, while the company’s revenues increased 8% year-over-year to $12.9 billion, they still missed analysts’ estimates of $13.03 billion. Adjusted earnings came in at $0.82 per share, in line with the consensus estimate of $0.82 per share.

While Jeffries analyst George Notter was impressed with the solid first-quarter results, he noted that CSCO’s guide for revenues and EPS in fiscal Q2 remained below Street estimates.

In Q2, the company expects its revenues to grow year-over-year between 4.5% and 6.5% or to $12.62 billion, while adjusted earnings are anticipated to come in from $0.80 to $0.82 per share. According to Notter, consensus estimates peg Q2 revenues at $12.8 billion.

The analyst attributes this lower Q2 estimate to component shortages. (See Insiders’ Hot Stocks on TipRanks)

Indeed, Chuck Robbins, Chair and CEO of Cisco, commented on its earnings call that component shortages “have resulted in extended lead times and higher costs for many of these components.”

However, Robbins added that the company continues to partner “closely with our key suppliers, leveraging our volume purchasing and extended supply commitments, as we address the supply challenges and cost impacts which we expect will continue into the second half of fiscal 2022.”

Analyst Notter noted another key concern for the stock: the mismatch between the increase in revenues and the rise in product orders. Cisco mentioned on its earnings call that its product orders were up by 33% year-over-year.

But the analyst thinks that the “order book is getting pumped up by customers getting orders in ahead of Cisco’s price increases.” Notter remarked that considering Cisco increased its prices thrice during fiscal Q1, he is “inclined to discount the strength in their order book.”

The analyst commented that it was also possible that customers were placing their orders earlier due to supply chain constraints.

Regarding the hike in prices, Notter noticed that Cisco has ramped up prices not only for its products but also for its Services and software licenses. This has led to the analyst presuming that CSCO is “working to spread the effect of the higher component costs across a wider swath of their SKUs [stock keeping units] in order to level out potential impacts on the Hardware portion of the business.”

Nonetheless, these concerns aside, the analyst remained bullish and reiterated a Buy rating and a price target of $65 (17.5% upside) on the stock.

This was because Notter approved of CSCO’s strategy to use “the current pandemic environment to further increase the mix of recurring revenue by selling hardware increasingly in a Subscription model.”

The rest of the Street, however, is cautiously optimistic about Cisco, with a Moderate Buy rating based on 9 Buys and 10 Holds. The average Cisco price target of $64 implies 15.7% upside potential to current levels.

Bottom Line

It is interesting to note that while CSCO is facing supply challenges that could persist into next year, Zoom is trying to build upon its success during the pandemic by offering new products and services.

Based on the upside potential over the next 12 months, Zoom seems to be a better Buy.

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

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