Zoom Video Communications (NASDAQ: ZM) reported its Q3 earnings report this week, with the ZM share price falling -3.8% on the day. Headline numbers were encouraging, with sales and earnings beating Wall Street targets. But forward guidance disappointed, while stock-based compensation and marketing spend raised concern.
Cathie Wood's ARK Invest remains a fan of Zoom stock. The investment firm's ZM investment thesis is based on the belief that Zoom's enterprise customers will make up most of its business by the end of 2026. Will that be enough to bring decent shareholder returns to those retail investors getting in now?
What Is Zoom Video Communications?
Zoom is for everyone. It offers a space where you can connect to others, share ideas, make plans, and build toward a future limited only by your imagination. Zoom Video Communications operates as a communications technology company. The company offers an easy-to-use communication platform and solutions for video meetings, phone calls, whiteboarding, and annotation for users to connect with anyone from anywhere.
Zoom Video Communications serves customers worldwide, offering an intuitive, scalable, and secure choice for large enterprises, small businesses, and individuals alike. Founded in 2011, Zoom is publicly traded (NASDAQ: ZM) and headquartered in San Jose, California.
Zoom and ZM stock soared in popularity during the work-from-home boom of the pandemic. Since then, its popularity has waned, but many businesses still favor its easy-to-use communications tools.
Zoom (ZM) provides a platform that enables people in various industries, including education, finance, government, and healthcare, to connect through voice, chat, content sharing, and video. The company operates 27 data centers around the world, and its public cloud allows it to deliver high-quality, high-definition video to its customers, even in low-bandwidth situations.
On May 19, 2022, Zoom acquired Solvvy, Inc., for $121.2m in cash. Solvvy is a private tech company specializing in customer support automation, adding customer service capabilities to Zoom plus conversational AI capabilities.
ZM Stock Q3 Financial Results
Zoom reported its Q3 financial results on November 21. FactSet analyst consensus estimates of $0.83 were beaten by an actual EPS of $1.07 (28% surprise). And a $1.094bn FactSet consensus for sales was beaten by actual returns of $1.101bn (0.7% surprise).
Total Revenue: $1.101bn (up 5% Y/Y)
Enterprise Revenue: $614m (up 20% Y/Y)
GAAP Operating Margin: 6%
Non-GAAP Operating Margin: 34.6%
GAAP net income: $48.4m ($0.16 per share), (-85.7% Y/Y)
Non-GAAP net income: $323.2m ($1.07 per share)
Cash and Marketable Securities: $5.2bn
Operating Net Cash: $295.3m (-25% Y/Y)
Adjusted Free Cash Flow: $272.6mm (-27% Y/Y)
Online Revenue: $487.6m (down 9% Y/Y)
GAAP income from operations: $66.5m
Customers contributing more than $100k in trailing 12 months' Revenue, up 31% Y/Y.
Eric S. Yuan, Zoom founder and CEO, commented:
At Zoomtopia, we announced a number of innovations including Zoom Mail and Zoom Calendar, along with new partnerships that are expected to power and enhance the modern work experience,
In Q3, we drove revenue above guidance with continued momentum in Enterprise. In addition, our non-GAAP operating income came in meaningfully higher than our outlook, setting us up to finish the year with full-year revenue growth, strong GAAP and non-GAAP profitability, and free cash flow that we expect to be at the high end of our range of $1bn to $1.15bn.
Q4 Financial Outlook
Total Revenue: between $1.095bn and $1.105bn
Revenue In Constant Currency: between $1.120bn and $1.130bn
Non-GAAP Income from Operations: between $316m and $326m.
Non-GAAP Diluted EPS: between $0.75 and $0.78
Full Fiscal Year 2023 ZM Guidance
Total Revenue: between $4.370bn and $4.380bn
Revenue In Constant Currency: between $4.442bn and $4.452bn
Non-GAAP Income from Operations: between $1.490bn and $1.500bn.
Non-GAAP Diluted EPS: between $3.91 and $3.94
Zoom Stock Q2 Financial Results
In Q2, Zoom beat FactSet analyst consensus EPS but missed on sales. In Q2, the company broke its record for the largest Zoom Phone deal twice in the quarter, first with a global retailer and then with an international bank, both with more than 125,000 seats.
Big contract wins for the quarter include one of the largest US healthcare providers (as yet unnamed), who chose Zoom Meetings and Zoom Phone to provide telehealth services to their caregivers and patients.
Meanwhile, UCLA added 15k Zoom Phone licenses in Q2. And Warner Bros Discovery Inc (NASDAQ: WBD) partnered with Zoom to expand its Meetings and Phone deployment with a fully integrated suite of communication services.
Family history company Ancestry and cyber solutions business Optiv have also signed enterprise contracts with Zoom.
How Does Zoom Make Money?
Zoom Video Communications makes money selling subscription packages to individuals and businesses. The software company offers a basic free tier with usage limitations. And for those who want more, it provides a range of plans and pricing tiers.
ZM Financials
ZM stock has a price-to-earnings ratio (P/E) of 33 and a forward P/E of 21. Its price-to-book-value (P/BV) is 3.8, which is well above the industry average of 0.5. ZM stock does not come with a dividend yield.
Over the past year, Zoom Video Communications Inc (ZM) has traded between $70.44 and $235.97. Today ZM shares trade at around $77.
FactSet analysts have a consensus Hold rating on ZM stock with a target share price of $87.96. This has been revised down since last quarter when the analyst consensus was Overweight ZM stock.
Zoom Stock Growth Potential
Zoom products are designed to drive efficiency and cost savings within organizations. Therefore, the company is hopeful that more prominent firms will adopt Zoom as an alternative to dated legacy software. Certainly, this is the thesis that keeps Cathie Wood's ARK Invest invested in Zoom stock.
ARK believes most of Zoom's business will center on enterprise customers by 2026. Indeed, during Q3, the company had around 209.3k Enterprise customers, displaying growth of 14% Y/Y. Plus, renewals remain strong.
Zoom’s CFO Kelly Steckelberg said:
The continued strength of our Enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments.
This follows Steckelberg's comments last quarter:
Enterprise meetings, especially internationally, continues to grow and there is still significant opportunity outside of the US to continue to grow our core meetings platform.
Meanwhile, the company is focused on innovation and constantly responding to consumer wishes.
Zoom Rooms and Zoom Phone are hitting several milestones and are essential to continued growth. The company believes that cloud migration and digital transformation remain a priority even when the economy slows.
And as the CEO mentions above, Zoom Mail and Zoom Calendar are new to the scene.
Despite a flagging share price, the company continues to sport strong margins, cash flows and balance.
ZM Stock Risks
Headwinds that Zoom has been facing in recent months include the strengthening dollar, weakness in new online subscriptions and, to a lesser extent, bookings breadth.
A strong dollar causes unfavorable forex conditions for certain foreign jurisdictions where Zoom operates.
Changing macro dynamics are hitting businesses hard, and Zoom is not immune. Inflation and a potential economic slowdown are factors investors should keep in mind.
The company is facing heightened deal scrutiny in attracting new business.
Softness in its online business is slowing growth.
The global energy crisis is another area of concern. If energy bills become too steep for consumers to manage, the work-from-home environment may come under pressure. The need for Zoom products could fall if workers head back to the office.
Furthermore, if the Russia-Ukraine war continues or worsens, leading to additional sanctions, tightened export restrictions, and more significant global economic disruptions and uncertainty, Zoom's business and the results of operations could be materially impacted.
The very high stock-based compensation reported in Q3 highlights a problem with Zoom stock. To retain and attract top tech talent, Zoom maintains its stock-based compensation package is vital.
Non-GAAP operating margins are shrinking.
Should You Invest in ZM?
ARK Invest believes the online weakness Zoom has faced should peak this year. And that customer churn should settle by the end of this year. Indeed, there's evidence of this in Q3, as churn has declined by 0.6% Y/Y and 0.5% Q/Q.
It is also impressive that Zoom's newer products, notably Zoom Phone and Contact Centre, continue outperforming its core video communication products.
The company has lost considerable stock market value over the past year, so its fundamental metrics appear more reasonable than they have previously. Nevertheless, a forward P/E of 21 and a P/BV of 4 are not cheap. Therefore, if the market continues to weigh on the tech sector, ZM stock could have further to fall.
Whether you should invest in ZM stock depends on your investing time horizon and belief in its ability to grow. It doesn't offer a dividend, so shareholders need to see sustainable growth to make investing worthwhile.
