Slowing Growth Leaves Zoom Investors In The Cold
Zoom Video Communications (NASDAQ:ZM) delivered a good second-quarter report and we were surprised by that. We were expecting to see the company miss the consensus estimates due to the declining use of its service. Although the pandemic is still impacting many businesses, the use of Zoom Video video conferencing services is being impacted by the reopening. The news the market took to heart, however, was the guidance.
The company's guidance for revenue growth came in slightly above the consensus estimate which is bad for two reasons. The first is that this market needs to see significantly better than expected results to get excited. The second is that the earnings guidance indicates margin pressures and weaker than expected earnings.
The bottom line is that Zoom Video’s growth is slowing from the high triple-digit pace it was setting last year to the mid-double-digits it is posting and possibly soon to the single digits, and that fact has the bears in control of share prices.
Zoom Video Blows Past The Consensus Estimate
Zoom Video had a great second quarter in terms of revenue, revenue growth, and performance relative to the consensus, but there are offsetting factors that have investors running for the exits. The company’s reported $1.02 billion in net revenue is up 53.7% versus last year and beat the consensus by 4000 basis points, but revenue growth slowed from the 350% range posted last year and the bar set by the analyst wasn't very high.
The company reports strong metrics in terms of its client base but, in our view, these growth trends are about to end. The company says customers contributing more than $100,000 to revenue over the trailing 12 months is up 131% while the number of businesses with more than 10 clients is up more than 130% for the 13th quarter in a row. On a year-over-year basis, the number of clients with more than 10 customers is up 36% and, based on the guidance, not expected to see sequential growth in the coming quarter.
Turning toward profitability, the company reports an operating margin of 28.8% and an adjusted operating margin of 41.6% which drove strong gains on the bottom line. This compares to the GAAP margin of 28.5% and the adjusted margin of 41.7% last year. On the bottom line, the GAAP EPS of $1.04 beat the market by $0.24 while the adjusted $1.36 beat by $0.20. Both are up more than 40% from last year and led the company to issue revised guidance.
The company is expecting full-year revenue in the range of $4.005 billion to $4.015 billion with EPS of $1.07 to $1.08 versus the $1.09 consensus target. Sequentially, Q3 revenue will be flat and we don’t see upside risk in the guidance. If anything, growth will continue to decelerate provided there are no widespread shutdowns this fall.
The Analysts Have Spoken, Zoom Has Peaked
While Marketbeat.com analyst’s data shows no sell-siders downgraded Zoom Video, only one of the seven notes issued in the wake of the report has been bullish. The bulk of the analysts, however, are lowering their price target and reassessing their outlook for this company. The consensus target for the share price is still well above current price action, but the trend in analysts' sentiment has reversed and that will weigh on price action in the near term at least.
Looking at the chart, Zoom Video is down nearly 15% in early action and at risk of breaking through a major support level. If Zoom share prices fall below $275, this stock could enter a sell-off that will take it below the $250 level and possibly below the $200 level. Trading at 75 times its consensus EPS estimate, Zoom Video is very highly valued for a stock that has passed its peak of growth.
