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Zoom: Waiting for Growth Normalization after 2020 Surge
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Zoom: Waiting for Growth Normalization after 2020 Surge

Zoom Video Communications, Inc. (ZM) is a cloud-based peer-to-peer software platform that connects people through video and online chat services. Its video-first communications platform is used for teleconferencing, telecommuting, distance education, and social relations. The company was founded in 2011 and is headquartered in San Jose, California.

2020 was exceptional for Zoom, as its stock surged from less than $70 a share in early January to almost $600. Now, with a 52-week range of $174.66 to $451.77, ZM stock has had a wild and tough year. 

Its shares have losses of about 43% in 2021, underperforming the Nasdaq. Zoom gave back a large portion of its 2020 gains, but not all. I am bearish on ZM stock.

Zoom Business News

Zoom has announced the termination of the merger agreement with Five9, a provider of cloud contact center software.

Zoom is expanding in other areas of business, unveiling its reseller partner program for Zoom Phone BYOC (bring your carrier), a decision expected to become a new revenue opportunity to resellers while offering maximum flexibility to customers. “Built on Zoom’s intuitive platform, Zoom Phone is a full-featured cloud phone system for businesses of all sizes.”

Zoom has invested in several innovations, such as the launch of Zoom Apps and Zoom Events to boost productivity for businesses and create interactive virtual events in what the company names a hybrid world.

Strategic deals such as Zoom becoming an official partner of Formula 1®, with a multi-year partnership, show that both brands place a lot of value on remote communication among the pandemic by focusing on virtual meetings.

Third Quarter Results: Strong Revenue and Net Income Growth

For Q3 of Fiscal Year 2022, ZM stock earnings were a beat, with EPS coming in at $1.11 versus the estimate of $1.09.

Total revenue for the third quarter was $1,050.8 million, up 35% year over year. GAAP income from operations for the third quarter was $290.9 million, up from $192.2 million in the third quarter of the Fiscal Year 2021.

Also, GAAP net income attributable to common stockholders for the third quarter was $340.3 million, or $1.11 per share, up from $198.4 million, or $0.66 per share in the third quarter of Fiscal Year 2021.

Risk Factors

In the Q3 conference call, Zoom founder and CEO Eric S. Yuan stated: “We are well on our way to becoming an indispensable platform for enterprises, individuals, and developers to connect, collaborate, and build in the flexible hybrid world of work. We believe our global brand, innovative technologies, and large customer base position us well for the future.”

It is possible that the number of people working from home will decline over time, even with new variants such as Omicron, as there are massive global efforts to end the pandemic via vaccines.

Zoom has a strong balance sheet and has become profitable. Still, there is an evident sales growth slowdown in 2021, and more specifically, the company has reported three consecutive quarters of declining sales growth (on a sequential basis).

For the four quarters this year that ended January 31, April 30, July 31, and October 31, sales growth reported was 13.6%, 8.4%, 6.8%, and 2.9%, respectively.

In the scenario that the pandemic is over within 2022, ZM stock will react abnormally to developments and news. After a revenue surge in 2020 and 2021, I argue that we should monitor the business prospects considering what we call statistical outliers or abnormal figures that distort established trends. If Zoom continues to report declining sales growth, I estimate its shares may face selling pressure.

Valuation: Pricey, with a Hint of Dilution

Shareholders have been diluted in the past year, with total shares outstanding growing by 4.2%. ZM stock is relatively overvalued based on its P/E ratio (50.3x) compared to the U.S. software industry average (47.4x) and based on its PEG Ratio (63.1x).

Wall Street’s Take

Zoom has a Moderate Buy consensus based on 12 Buys, 13 Holds, and one Sell rating. The average Zoom price target of $297.50 represents 55% upside potential.

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

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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