Zoom Video Communications (NASDAQ: ZM) has been one of the success stories of 2020. The COVID-19 pandemic accelerated the trend towards work from home as businesses were shut, increasing the demand for collaboration tools.
Zoom stock gained a staggering 765% between January and mid-October before falling by 30%. Despite the recent weakness, shares are still up over 500% year-to-date. Comparatively, the S&P 500 Index has gained 14% in 2020.
So, should you buy Zoom stock right now?
Zoom sales were up 367% in fiscal Q3 of 2021
Zoom recently reported its fiscal third quarter of 2021 results ended in October. The company’s sales were up 367% year-over-year at $777 million while net income soared to $198 million or $0.99 per share, up from a paltry $2 million in the prior-year period.
Analysts expected the company to report sales of $694 million and earnings of $0.76. During the earnings call, Zoom CEO Eric Yuan said, “We remain focused on the communication needs of our customers and communities as they navigate the current environment and adapt to a new world of work from anywhere using Zoom. We aspire to provide the most innovative, secure, reliable, and high-quality communications platform to help people connect, collaborate, build and learn on Zoom.”
In fiscal 2021, the company expects sales to rise 314% year-over-year to $2.58 billion and it has forecast Q4 sales between $806 million and $811 million, above consensus estimates of $730 million. Zoom claimed its outlook has taken the demand for remote work solutions into consideration and also accounts for increased churn in Q4 driven by a higher percentage of users who have purchased a monthly subscription.
In Q3 it added 433,700 customers with an employee base of over 10, up 485% year-over-year. Further, 1,289 customers contributed $100,000 in the last 12-months, a growth of 136% year-over-year.
Zoom stock is still expensive
Zoom is valued at a market cap of $117.4 billion which means its trading at a forward price to earnings multiple of 45.6x and a price to earnings multiple of 146x. However, investors should also note that revenue and adjusted earnings soared by 367% and 1,079% respectively in Q3.
Does this mean Zoom stock is trading at a discount compared to its growth rate? In fiscal 2022, Wall Street expects sales growth to normalize to 38.5% to $3.54 billion while earnings might rise by just 4%. However, Zoom has crushed market expectations in the last four quarters and might continue to do so in the future as well.
Zoom’s net dollar expansion rate in the last 12-months is a healthy 130% and the company continues to benefit from secular tailwinds. Its operating cash flow soared 565% to $411.5 million while free cash flow stood at $388.2 million, up 610%.
We can see Zoom Video has high operating leverage and an increase in sales results in a massive expansion of its bottom-line. Analysts tracing Zoom stock have a 12-month average trading price of $486 which is 18% above the current trading price.
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