Zoom: Glory Days Are Over
- Zoom breaks below $350 as guidance fails to spark interest in the stock.
- The company only predicts sequential revenue growth of 2%.
- The stock is still insanely expensive trading at 28x FY22 revenue targets.
- This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Get started today »
No other company probably benefitted as much from the locked-down economy as much as Zoom Video Communications (NASDAQ:ZM), but those glory days are now over. The stock has already been under pressure since hitting an all-time high back in late 2020 at nearly $600. My investment thesis remains highly negative on the stock as the insane growth days are over.
Image Source: Zoom Video website
For the just reported quarter, Zoom reported some gaudy numbers. FQ4'21 revenues surged 369% to reach $883 million. Non-GAAP net income grew 839% to $361 million and operating cash flow had a similar growth rate to reach $399 million in the quarter. The company generated some impressive margins as the whole world suddenly transitioned to video conferencing apps.
These metrics are off the charts considering Zoom was already growing at an 80% clip. Even the guidance in comparison to analyst expectations for FY22 is solid, but the issue with the stock is the trends. The revenue trend chart shows growth plateauing at these elevated levels and guidance suggests the numbers are about to collapse.
Zoom reported FQ3'21 customers with more than 10 employees at 433,700 and the number only grew to 467,100 in the last quarter. The YoY growth rate at 470% is off the charts, but the amount of customers using the communications service only grew 8% sequentially after adding 385,000 customers for the whole year.
Any company with an employee base not using Zoom by now as the COVID-19 crisis is starting to rescind based on lower case counts as the vaccines are distributed probably isn't going to suddenly signup in 2021. Without new customers, Zoom will have to expand services utilized by existing customers while encouraging those existing customers to not return to business travel that bypasses the need for video conferencing.
The management team apparently sees this issue by guiding FQ1'22 revenues to only $903 million, just up $20 million sequentially. The market is now fretting over the slower growth rates. One way for investors to view the upside potential of the tepid FQ1'22 guidance is the recent return to historical quarterly revenue beats.
Before the virus crisis, Zoom regularly beat quarterly revenue estimates by as little as just 6%. The revenue beats jumped to over 61% last FQ1 and has slowly declined back to only a 9% surprise in the last quarter.
Source: SA earnings surprise
What this means is that guidance for FQ1'22 revenues of $903 million and growth in the range of 2% sequentially is much more in line with what Zoom will actually report. A traditional 6% revenue beat will place revenues at $956 million for still substantial growth over last FQ1.
What ultimately matters is the reported growth rates in the last 3 quarters of this fiscal year. Revenues doubled sequentially in FQ2'21 to $664 million and surged on towards $883 million in FQ4'21. As the company only talks about current quarter revenues topping $900 million, investors are starting to wake up to the more normal growth rates ahead. The stock around $350 with a market cap of $105 billion still isn't factoring in a return to normal times, even at these elevated revenue levels.
As the CFO noted on the prepared remarks, the customer mix has shifted to 50% of revenues from customers being billed monthly. A move away from annual bills suggests customers aren't expecting to either continue using Zoom at all or definitely not at the same level as over the last year.
Fantastic Business Mispriced
Nobody will doubt that Zoom saved most businesses and even schools by allowing people to stay in contact as the world was suddenly shut down last March. The company saw accelerating growth during the period and became the clear leader in the video conferencing app space due to the ease of signup and use with large groups.
Source: FQ4'21 presentation
Due to security issues in the past, institutions such as my daughter's school switched away from Zoom just as the above chart stopped reporting usage last October. Cisco Systems (CSCO) and Microsoft (MSFT) both offer business solutions to compete with Zoom along with the other parties listed in the chart. Some companies switching to these business solutions could always contribute to slower growth going forward.
At this point, nobody doubts the market control of Zoom. The company is busy expanding the growth opportunities with new products such as Zoom Phone providing a unified communications product adding thousands of new customers. Some rumors even have the company entering the contact center space and the threat had stocks like Five9 (FIVN) dropping on the news as Zoom has become a powerhouse in the communications space.
The problem here is that growth is normalizing and the stock still trades as if growth is exponential. Zoom still trades with a market cap in excess of $105 billion while the company only guided to revenues of $3.77 billion in the fiscal year. Companies guiding to minimal sequential revenue growth don't typically trade at 28x forward revenue estimates.
The key investor takeaway is that Zoom is still heading lower. As the stock breaks strong support around $350, Zoom could easily dip back towards $250 and even $150 where a more reasonable P/S multiple would finally make the stock appealing.
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This article was written by
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