Zoom: Beats Expectations During Q1, But Is It Enough To Justify Its Lofty Premium?
There are few companies that benefited more from the stay-at-home economy created by the COVID-19 pandemic than Zoom Video Communications (ZM). When the world turned upside down, the remote work trend was accelerated in an unforeseen way. Business had been trending in this direction due to technological innovation and continued internet penetration across the world, yet social distancing regulations shoved ZM into the spotlight during the last year and the company has performed wonderfully.
Zoom began trading in April of 2019 at $62/share and today, the stock trades for $342.66/share. ZM shares are up more than 65% during the last year; however, even with these tremendous gains in mind, it’s important to note that ZM shares are down 41.8% from the all-time highs of $588.84 that they posted in October of 2020.
Now that vaccinations are widespread, COVID-19 caseloads are falling, and there is a thought that a semblance of herd immunity and therefore, a return to a sense of normalcy is on the horizon, ZM shares have lost a bit of their luster. Yet, without a doubt, remote work and video conferencing will remain a big part of the future of enterprise moving forward.
It’s clear that investors are weighing the valuation risks (ZM shares are priced with a premium growth multiple) against Zoom’s growth prospects. The stock is a bit of a battle ground right now. And with that in mind, we wanted to take a look at what the analysts that the Nobias algorithm ranks as 4 and 5-stars have been saying about the stock lately.
Throughout 2021, we’ve witnessed a rotation out of the growth oriented names that benefited from the pandemic period to more value oriented stocks that the market appears to believe will be the major beneficiaries of a reflationary trade.
Continued stimulus and easy monetary policy by the Federal Reserve, as well as other central banks from across the globe, combined with the strong economic figures being posted as economies reopen, have created an inflationary threat that has the potential to lead to higher interest rates.
The fear of higher rates has taken the wind out of the sales of the speculative growth stocks and Zoom Video has certainly suffered because of this trend. Yet, as Chris Lange, a Nobias 4-star ranked analyst who writes for 24/7 Wall St. posted in a recent article, Cathie Wood who has become famous for her unique investing philosophies and the success of her Ark Invest ETFs throughout the pandemic, continues to buy shares of Zoom Video.
On May 28th, Lange said, “One of the ARK exchange-traded funds run by ETF star Cathie Wood made a huge purchase on Thursday. Accordingly, this fund bought over 55,000 shares of Zoom Video Communications Inc. (NASDAQ: ZM) shares, as the price of this ETF gained about 1% in Thursday’s session.” He continued saying, “At Thursday’s closing price, this would have valued this purchase at roughly $19.0 million. Even though this is a small fraction of the total holdings, every little bit counts. ARKK is up 85% in the past year.”
ZM bulls were obviously happy to see that Wood is still bullish on this company. And, even after ZM’s 40%+ sell-off, she’s not the only one. Zoom Video posted first quarter earnings after the market’s closing bell on June 1st and beat consensus Wall Street estimates on both the top and bottom lines.
IAM Neswire, a Nobias 5-star rated analyst, covered ZM’s earning report in a recent article, saying, “After the closing bell on Tuesday, Zoom Video Communications exceeded estimates across the board with its first-quarter results, seeing 50% revenue growth for the full fiscal year as expansion drops compared to a pandemic-shaped year during which the platform reached unprecedented heights. The shares rose 4% in extended trading after initially falling as much as 5% due to signs of a looming slowdown that is bound to arrive with new normalcy.”
IAM News continued, saying, “With better-than-expected first-quarter results Tuesday, Zoom showed a sales growth of 191% as revenue for the quarter which ended on April 30th jumped from $328.2 million a year earlier.” The analyst noted, “The company's gross margin widened to 73.9% from 69.4% in the previous quarter, primarily thanks to the optimization of public cloud resources.”
IAM News concluded their piece, saying, ‘Even as COVID-19 eases its grip that fueled stratospheric growth of the video platform, people are not getting tired of Zoom despite the so-called ‘Zoom fatigue' phenomenon that threatened its newly found fame. But even after becoming a global name due to a virus that grappled the whole globe, Zoom entered the new fiscal year with a very strong quarter shaped by YoY revenue growth, strong profitability, and impressive cash flow.”
While the growth figures posted by ZM during Q1 were impressive, it is worth noting that the pace of the company’s growth is slowing. Nick Clarkson, the Web Editor at InvestorPlace who is also a Nobias 5-star rated analyst, recently published a report highlighting ZM’s Q1 results which talked about the company’s growth rate, saying, “This is an impressive rise, but revenue grew 369% in the previous quarter — pointing toward a slowdown in business as the pandemic also fades.” And yet, even as growth slows, Clarkson points out that ZM’s $1.32 earnings-per-share results “blew past analysts’ estimates for EPS of 99 cents” and moving forward, it appears that the company’s expectations are higher than Wall Street’s as well.
ZM provided Q2 guidance during the quarterly results and Clarkson noted that “the firm [is] expecting revenue between $985 million and $990 million, and EPS between $1.14 and $1.15.” He says, “Meanwhile, Wall Street is looking for revenue of $931.74 million and EPS of 94 cents for the period,” showing that ZM’s estimate is approximately 6% higher than the Street’s consensus.
Clarkson shows that ZM’s bottom-line guidance is higher than Wall Street’s as well, saying, “The company also raised their guidance for FY2022, including an expected revenue range of $3.975 billion to $3.99 billion and EPS between $4.56 and $4.61.” He continued, “That said, analysts are expecting revenue of $3.8 billion and EPS of $3.76 for the year.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Right now, ZM shares trade with a blended price-to-earnings ratio of 90.6x. ZM shares are trading with a forward price-to-earnings multiple of roughly 74x (relative to the mid-point of the company’s recently provided full-year EPS guidance). This is well above the broad market’s ~21x forward multiple and to maintain this sort of premium valuation, ZM’s management team is going to have to continue to produce strong growth.
ZM’s earnings-per-share rocketed higher by 854% during its fiscal 2021. Right now, the company’s fiscal 2022 guidance calls for roughly 38% bottom-line growth. However, right now, analysts are expecting this growth trend to grind to a halt during fiscal 2023. Today, the consensus estimate on Wall Street for ZM’s 2023 earnings is $4.63/share, which is less than 1% higher than the upper end of the company’s 2022 guidance. If earnings growth flattens, it appears that ZM could have significant downside ahead due to the lofty premium attached to shares.
Yet, as Clarkson pointed out, ZM outperformed analyst estimates during Q1 and it’s certainly possible that this trend continues. It’s incredibly difficult to predict growth when we’re talking about an innovative name like ZM. This is especially the case coming out of the pandemic environment where no one truly knows what the “new normal” will look like.
The blue chip (4 and 5-star rated) Nobias analysts appear to be torn on the stock as well. Since May 1st, we’ve seen 17 reports published on Zoom Video. 8 of these reports came with “Buy” ratings, 2 came with “Neutral” outlooks, and 7 had “Sell” ratings attached. In other words, the tug-of-war between bulls and bears surrounding this stock remains even, implying a very interesting future ahead for ZM shares.
Disclosure: Nicholas Ward is long shares of ARKK, ARKW, ARKG, ARKF, ARKQ, and ARKX (Cathie Wood’s Ark Invest actively managed ETFs). . Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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