Why Zoom Stock Is Down 64% From Record Highs?
November 26 2021 - 4:51AM
Finscreener.org
Shares of Zoom
Video Communications (NASDAQ:
ZM) are currently trading at $208 which is down
more than 60% from all-time highs. The
video collaboration giant
is now valued at a market cap of $62
billion allowing investors to buy the dip. Let’s see if the
pullback provides investors with a buying opportunity or if ZM
stock is similar to a falling knife.
Zoom Video: Recent quarterly results
In the fiscal third quarter of
2022 that ended in October, Zoom Video reported revenue of $1.05
billion which was an increase of 35% year over year. It was lower
than the 54% growth experienced in Q2 and much lower than the
monumental growth of 367% in Q3 of 2021. It reported adjusted
earnings per share of $1.11 in Q3. Comparatively, Wall Street
forecast Q3 sales at $1.02 billion and adjusted earnings at $1.09
per share.
Despite its stellar revenue
growth, the company managed to increase earnings by just 11% year
over year which suggests it continues to reinvest cash flows to
fund its growth opportunities.
The company’s management forecast
sales of $1.05 billion in Q4 which indicates revenue growth of 19%.
Comparatively, its operating income and adjusted earnings were
forecast at $362 million and $1.07 respectively.
Zoom stock fell more than 10%
following its Q3 results as analysts and investors were left
unimpressed. Several brokerage houses lowered their 12-month price
target on Zoom stock. For example, Evercore ISI analyst Peter
Levine reduced the share price target for ZM stock to $235 from
$255. Deutsche Bank analyst Matthew Nikam also reduced Zoom Video’s
price target to $280 from $350 as he expects profit margins to
remain under pressure given the company’s growth
investments.
Nikam explained, “While
weU+02019re positive on ZoomU+02019s strategic initiatives and
investments in key growth areas, we find it tougher to like a stock
with more sharply decelerating growth and incremental pressure on
profitability.”
What next for ZM stock?
Zoom aims to focus on expanding
its revenue base with larger enterprises on the back of its
proprietary tools such as Zoom Rooms video conference solutions. It
ended the quarter with 2,057 customers that generate over $100,000
in annual revenues, an increase of 94% year over year. Another
encouraging sign for Zoom Video is its net retention rate of 130%
which suggests an increase in consumer spending. Basically,
customers have increased spending by more than 30% on the Zoom
platform in the last year.
Despite a deceleration in revenue
growth, Zoom Video sales surpassed more than $1 billion for the
second consecutive quarter. Driven by increased consumer spending
Zoom Video’s volume of large contracts continue to
expand.
This allowed Zoom to generate
$400 million in
operating cash flow
in Q3. In the first nine months of
fiscal 2022, the company’s adjusted earnings surpassed a billion
dollars. It has also expanded its profit margin outlook to between
$4.84 and $4.85 per share, up from $4.75 and $4.79 per share for
the current fiscal year.
Zoom stock remains overvalued
Wall Street expects Zoom
Video sales to rise by 53.3% to $4.06 billion in fiscal 2022 and by
17% to $4.76 billion in fiscal 2023. Comparatively, its adjusted
earnings per share are expected to increase from $3.34 per share in
2021 to $4.62 per share in fiscal 2023. Despite the massive
pullback in Zoom stock, it’s valued at a forward price to 2023
sales multiple of 12.81x and a price to earnings multiple of 45x
which is steep.
Alternatively, growth stocks
command a premium, and Zoom stock offers enticing upside potential.
Analysts have a 12-month average price target of $338 which is 60%
above its current trading price.
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