We knew earnings from Zoom Video Communications (NASDAQ:ZM) were going to be good. A steady rise in Zoom stock ahead of the release signaled they might be even better. Now that the results for the fiscal first quarter are in, they’re simply stunning.
The novel coronavirus pandemic unsurprisingly has led to a massive increase in usage on Zoom’s platform. But what earnings show is how effectively Zoom has been able to turn that usage into revenue and profits.
Simply put, Zoom just put together one of the most impressive quarters of any public company — ever. Secular changes in the way Americans — and employees worldwide — work suggest its growth can continue for years to come.
But with ZM stock gaining over 5% as I write this — and having more than tripled year-to-date — valuation is a risk. So is competition.
And so I’d like to see Zoom stock a little cheaper. This looks like a fantastic buy on a pullback. Of course, after that earnings report, we may not get a pullback for quite some time.
An Incredible Earnings Report
A pair of analyst quotes highlight just how impressive Zoom’s Q1 earnings release was. An analyst from JPMorgan Chase called the results “the largest beat we have witnessed in covering software for over 20 years.” Piper Sandler went one better, saying “Zoom reported the greatest quarter in enterprise software’s history in our view.”
The numbers are staggering. Revenue in the quarter increased 169% year-over-year. The number of customers with over 10 employees spiked 354%, from about 58,000 to over 265,000.
And it’s not as if Zoom Video is buying that growth. The company is nicely profitable. Adjusted earnings increased more than tenfold. Perhaps the most impressive figure is that Zoom’s free cash flow was $252 million — over 70% of revenue.
The analyst praise makes some sense. Bear in mind that Wall Street consensus implied a little over $202 million in revenue. Zoom generated $328 million.
Even updated guidance is impressive. Heading into the quarter, Zoom Video was looking for full-year fiscal 2021 (ending January) revenue around $915 million. The new outlook is almost double that, at nearly $1.8 billion. Expected adjusted earnings per share are more than triple the post-Q4 expectation.
It’s not surprising Zoom stock rallied after the report. The surprise might be that it didn’t move higher.
The Long-Term Case for ZM Stock
To be sure, part of the reason for the relatively muted post-earnings rally is that ZM stock had gone parabolic heading into the report. Shares now have gained 36% just in the last week.
But with a stock like this, it’s fair to ask: what stops the rally? It’s hard to see what might. “Work from home” increasingly is more than a short-term trend. We’ve seen Shopify (NYSE:SHOP) chief executive officer Tobi Lütke take his company to working fully remote, while saying that the days of “office centricity” are over. Facebook (NASDAQ:FB) is planning for its workforce to work from home on a permanent basis.
Executives that used to fly around the country for meetings are now holding Zoom calls instead. And as companies figure out that such calls are far cheaper, and just as productive, the business world is going to change.
That, in turn, means growth for Zoom Video that isn’t going to end when the coronavirus does.
Valuation and Competition
There are two factors that can at least slow the rally in ZM stock, even if I’m skeptical they will stop it.
The first is valuation. Even after an enormously impressive quarter, and with guidance hiked substantially, Zoom stock is not cheap. Shares trade near 200x FY21 adjusted EPS guidance. Price to revenue is headed toward 35x.
Zoom is likely to post hugely impressive growth over the next few years. But the stock is pricing in at least a good chunk of that performance.
The second concern is competition. Facebook, with its Rooms, and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), with Google Meet, are trying to take market share. More notably, Microsoft (NASDAQ:MSFT) has invested more in Teams, part of its Office 365 suite.
Those competitors aren’t going to put Zoom Video out of business, or even knock it off the top spot in terms of market share. But they can provide pricing pressure, which would hurt Zoom Video’s impressive margins.
From a broad standpoint, neither risk looks fatal to the bull case for Zoom’s stock. I’m always arguing that investors should own innovators in growing markets — and Zoom Video fits that bill.
But I would hope for at least a somewhat cheaper price, after the YTD rally and given one of the highest valuations in the market. Of course, if Zoom Video keeps performing like this, a cheaper price may never be available.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.