ZM: Zoom Video Gains Post Earnings and Revenue Beat

Shares of video collaboration company Zoom Video (NASDAQ: ZM) are trading 3.3% higher in early market trading today. Valued at a market cap of $20 billion, ZM stock is currently trading 88% below all-time highs and still needs to surge over 800% to reclaim record prices.

Zoom announced its fiscal Q2 of 2024 (ended in July) results yesterday and reported sales of $1.14 billion and adjusted earnings of $1.34 per share. Analysts forecast the company to report revenue of $1.12 billion and earnings of $1.05 per share in the July quarter.

Let’s see what impacted Zoom stock in Q2 and if you should buy it at the current price.

Zoom sales surged 3.6% year over year

Zoom was among the hottest tech stocks during the COVID-19 pandemic as it increased sales from $622 million in fiscal 2020 to $4.4 billion in fiscal 2023. In addition to macroeconomic challenges, investors were worried about the company’s decelerating top-line growth, which aggravated the pullback in share prices in recent months.

In Q2, Zoom grew sales by just 3.6% year over year due to lower enterprise spending, rising competition, and the reopening of economies. It ended the quarter with 218,100 enterprise customers, up 1% from 215,900 in the April quarter. A business partner is defined as clients that work with Zoom’s direct sales team or resellers of partners.

However, Zoom’s guidance for fiscal Q3 was short of estimates. Zoom management forecasts earnings between $1.07 and $1.09 per share, with revenue between $1.115 billion and $1.12 billion in the quarter ending in October. Analysts estimated sales at $1.13 billion with adjusted earnings of $1.03 per share in Q3. 

For fiscal 2024, Zoom sees earnings between $4.63 and $4.67 per share with sales between $4.485 billion and $4.495 billion. At the midpoint forecast, sales might increase by 2% year over year. During its Q1 earnings call, Zoom estimated 2024 sales between $4.465 billion and $4.485 billion, with earnings between $4.25 and $4.31 per share.

Comparatively, Wall Street expects Zoom to end the current fiscal year with sales of $4.49 billion and earnings of $4.30 per share.

What is the target price for Zoom stock?

Priced at less than five times forward sales and 16.3x forward earnings, ZM stock is quite reasonable. Prior to its earnings report, analysts had an average price target of $83.4 for the tech stock, which is 24% higher than current prices. It will be interesting to see if these target prices are revised following Q2 results.

Zoom’s Chief Financial Officer, Kelly Steckelberg, emphasized, “Our increased total revenue guidance reflects a consistent view on enterprise, with tempered expectations for online for the remainder of the year.”

However, the company also maintained Zoom is wrestling with a longer sales cycle as clients are looking to curb spending to offset rising interest rates and lower costs. Zoom is also focused on optimizing its cost base amid sluggish spending patterns.

Zoom disclosed its investment in artificial intelligence startup Anthropic. It also claimed unlike competitors, Zoom won't charge exorbitant prices for its AI-powered features, which will be integrated with existing software.

Zoom is bullish on its enterprise division, a segment that has expanded by double-digit percentages in the last two quarters due to a widening base of customers. These contracts were renewed at a rate that was higher by 12% year over year.

Zoom is also onboarding enterprises with large contract values. For example, in Q1, contracts with spending over $100,000 annually rose 23%.

The tech company continues to expand cash flows and surpassed $400 million in operating cash flow in Q1. With a debt-free balance sheet, ZM stock has over $6 billion of cash on its books, which can be deployed to target acquisition or invest in R&D.

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