Zoom's Results Were Not Good Enough

Summary

• Zoom is falling despite reporting blow-out quarterly results.
• The company also provided better than expected guidance.
• In the end it was just not good enough.
• Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

Zoom (NASDAQ:ZM) may have reported amazing results and even better guidance, but still, it was just not good enough. The stock valuation is too high and the growth is not fast enough to achieve anything close to what the market has priced into the equity's $120 billion market cap.

The shares are down about 2% mid-day on March 2 following blowout fiscal fourth quarter 2021 earnings of $1.22, which was 50% better than analysts' consensus estimates, while revenue topped $822 billion almost 9% better than estimates. The company even provided better than expected fiscal 2022 earnings guidance of $3.62 per share at the mid-point of the range, better than estimates of $2.96.

(Refinitiv)

Not Enough Growth

Following the results, earnings estimates have started to rise, and analysts now see the company earnings around $3.15. But over time, consensus estimates for 2022 should climb to around $3.62 per share or another 15%. However, it doesn't help much. Even with the higher earnings guidance, the company still trades for 110 times 2022 earnings estimates, an insane valuation for a company forecasting earnings growth of just 8.3% versus fiscal 2021.

It doesn't get much better because analysts see earnings climbing to around $4.55 in 2024, leaving the stock trading around 90 times 2024 earnings estimates. Give that 2024 estimates a boost of another 15%, assuming not every analyst has boosted their estimates yet, and earnings would climb to $5.23 per share, a PE of 76.4.

It really gets worse because Zoom currently trades for 65 times 2024 EV/EBITDA, 22.4 times price to sales, and 63.3 times price to free cash flow. There isn't one metric that suggests Zoom's stock is even remotely close to fairly valued.

Currently, the company's earnings would need to soar to around $10 per share in 2024 to make this stock even remotely reasonably value, at a PE of 40. That would be a compound annual growth rate over the next three years, 2022, 2023, and 2024 of more than 40%. The company is off to a bad start, guiding to just 8%. It seems unlikely that Zoom can deliver that type of earnings growth over the next three years to maintain its current valuation.

This isn't to say this can't happen, but it's essential to understand just how much growth needs to occur over the next few years for the stock to be worth what it is currently and, more importantly, continue to appreciate it.

Not to mention the big tailwind of the pandemic is now coming to an end. That isn't to say people won't continue to use Zoom, but it seems likely that fewer people will be using it. It even suggests that Zoom's big growth is now behind it because what will drive top-line growth to a level above and beyond what we the company has just witnessed.

Trends Are Lower

In all, it suggests that multiples for Zoom need to compress, fall, and that should result in the stock price dropping. In fact, the chart shows that the stock failed to move beyond resistance at $450 on March 2, and that could be setting up a decline back to the lower end of its recent trading range at $325, a drop of more than 17%. A break of support at $325 would be extremely damaging and signal the potential to fall back to $275.

Source: TradingView

Even if the stock fell back to $275, it would still be trading for around 52 times the inflated $5.23 in 2024 mentioned previously in the article.

This isn't to suggest that Zoom is going away - it is not. It isn't even to suggest that Zoom does not have good technology - it does have good technology. The stock's current valuation doesn't fit with its fundamentals nor growth prospects. It's just not growing fast enough to maintain a $120 billion valuation.

Fundamentals do matter at some point. They always do. That time for Zoom may be now.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

Comments

[ZarkaX]

Didn’t get it.
Right now it trade about 36 TTM P/S.
What is the problem here?
For a company with so much users around the world the options are unlimited.

[kreed020]

Sliced right through the 200DMA.

[CordCut]

Down $9 to $362. People the high growth tech companies are being rerated lower since interest rates are floating up. Smart money is leaving the tech train for a short time until the bottom falls out. Then they'll get back in. Don't be a loner at the train station.

[Bignamehere]

@CordCut or just add to your positions on the way down, because tech always comes back if the company is run well.

[Astute]

@Bignamehere yeah and if you bought Cisco in 2000 you'd still be waiting.

[Bignamehere]

@Astute can’t you say that about hundreds of companies? Also, wasn’t Cisco directly up against 3com, Nortel, and Lucent?

[HitaNew]

Thank you for the article.

[User 1051056]

I bought at $337 a while ago. It is a good company in a growth area. Is it going to grow 100% per year every year? No. But, they are expecting 40% growth Y over Y. IF it drops more, I will buy more. I expect to hold it for 3 to 5 years.

[Team17]

I bought this evening at 372. Looks relatively good value to me.

[educandi]

One analyst came out today and raised their price target to 541. Guess we'll see. So many reports I read are like the one above and that is the stock is way over valued.

[cytrax]

@educandi Why do we need an analyst to tell what their price target is when we have an the metrics to run the numbers. This is clearly overvalued based on fundamentals. That’s the only rational conclusion. Sure, markets do get irrational. But that’s not what a price target should be based on.

[Larry Hall]

Zoom's results were enough for me to open a position today, admittedly just 2% of portfolio but a good start, got in at 376 and a little. I think this is a buying opp if prepared to hold for a few years, which I am. Great company to own.

[rsu82]

@Larry Hall Buy the dips have been working.

[Larry Hall]

@rsu82 Added a very small amount at 362. Will research more on ZM and may add in the future; pausing for now.

[Fundamental Trader]

Mott Capital .... best contrarian indicator on SA!

[Andrew Crosby]

Has a solid point, but is wrong. The fact that it HAD been trading that high is solid proof is deserves some premium for growth.
Of course P/E matters, but the real question is potential. They can ABSOLUTELY further monetize their current clientele. Like every other growth company out there, they focus on revenue first, then focus on monetizing it. Imagine if they made money on ads and actually made money on subscriptions... all other tech companies make a huge portion of profit on ads. His article assumes no change in business model, which can be fair, but don't count on it.

[4121]

I have read all the recent articles on ZM and their comments. I have yet to see one that included how ZM matches up to the competition in terms of what it offers compared to the competition and it's comparative ease of use. Also, WHICH IS NEVER COVERED, how easy it would be for a deep-pocketed competitor to essentially copy what ZM offers in terms of technology.

[Astute]

@4121 eh have you heard of Microsoft Teams?

[hodedofome]

@4121 If it was that easy, everyone would be doing it. The fact that everyone is not doing it shows you that it's hard. You don't just create an app like Zoom that works like Zoom overnight. It has millions of lines of code. It takes extremely smart engineers to make it work seamlessly and on-demand all over the world with no lag. There aren't many engineers who can make something work as well as Zoom.

It takes a long time to create all the integrations Zoom has with other products, the more integrations a product has, the more useful it is.

And once a product takes hold in the market, it becomes the go-to standard. Everyone goes to it, nothing else is really considered. You know it works with your current apps and you know all your friends and co-workers use it and know how to use it.

There will come a day where something else takes the place of Zoom, but that takes years, just like it took years for Zoom to become the standard over Webex, GoToMeeting, Skype, etc.

We can argue about the stock, but the battle has already been won with online meetings. It's Zoom and then Teams and then everyone else.

[Fundamental Trader]

@4121 Microsoft have been trying for years and so have Google.

Both have failed so far.

Like most remote teachers around the World, I use Zoom and have done for about 5 years. I've tried all the other major platforms, including Teams, and none of them are even close.

If Zoom video is so easy to copy, how is it not even Microsoft have managed it?

PS Good luck with your short - you're gonna need it!

[northvalley]

Management has been consistently providing very conservative guidance. In fact, on average, the revenue surprise in the past 4 quarters since the onset of the pandemic was about 25% above consensus. But let's just use 10%, that will put FY2022 revenue about $4.1B. Given 40% or above for the operating margin, that will give you $1.640B in operating profit, or about $5.27 per share on operating profit. Now figuring out the tax rate is a bit tricky, but let's assume 15%, that will put you at $4.48 EPS. This means the stock (currently $372) is trading at 83 times PE ratio, when the top line is growing at 54% in FY2022.

[jcaceres88]

agree here

[kreed020]

Down almost $40 bucks today or $80 from yesterday afterhours. Obviously people want out right now. Tomorrow is a new day and it could be up $50. Reminds me of playing craps in Vegas.

[jmaella]

I would have liked to read this article yesterday night at 10pm, when ZM was +10% AH.

[dundey]

"Not growing fast enough" LOL!
Revenue +370%, customer growth +470%, GAAP EPS +80%, Today's dip is a buying opportunity.

[Astute]

It's funny, no matter how clearly something is spelled out, you just have to read a few comments to see there are so many people in denial.

[Fundamental Trader]

@Astute PEG 0.99

Do you even know what that number means?

Be careful with that short - it might burn you.

[Astute]

@Fundamental Trader the short is working out quite well thanks for asking.
I know what a PEG ratio is too and I know that the forward PEG is not 1.

[folge]

"it seems likely that fewer people will be using it"
I can't get over that one. Do you even live in the United States?
You have no credibility.

[Michael Rogus]

Ahh Valuation? I've seen worse.

[dadjag69]

@Michael Rogus I bet you also saw more reasonable valuations.

[RichieNcog]

Then why was it trading @ 440 the day before earnings? Nothing in this article explains why 24 hours after beating all projections the stock dropped 6%, it's just general comments that would have applied prior