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 we're positive on Zoom's 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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