The Zoom Video Communications Selloff Is Overextended
Shares of Zoom Video Communications (NASDAQ:ZM) have done little more than move lower since hitting the pandemic peak way back in 2020, but the selling may be over.
The stock is finally trading at a more reasonable, if still above-the-market-average, 25X its earnings and outperforming at all levels. We ourselves were skeptical of this company’s future in the post-social-distancing world and we have been proven wrong.
Not only is Zoom Video Communication proving itself to be a player in today’s digitally connected world, but also to be a cash-generating powerhouse.
Zoom Video Communications Beats And Raises
Zoom Video Communications had a great quarter producing $1.07 billion in revenue for a growth of 11.9% over last year. The revenue was only as expected relative to the Marketbeat.com consensus, but it is accompanied by a better than expected margin so we’ll give them a pass.
Internally, the metrics are good as well and point to continued momentum in the business. The company reports the number of clients contributing more than $100K is up 46% on a TTM basis, while Enterprise clients are up 24% and compounded by a 124% increase in net dollar expansion.
Moving down to the margin, there was some margin compression but far less than anticipated. The company reported a 17.4% GAAP operating margin that, when adjusted for stock-based compensation, related charges, and other charges becomes a more robust 37.2%.
On a cash-from-ops and FCF basis, margins came in at 49% and 46% while on the bottom line the $1.03 in adjusted EPS beat by $0.16.
It was the guidance, however, that really caught our attention. The company is maintaining its previous guidance for revenue of $4.53 to $4.55 billion versus the $4.54 consensus, but raised the guidance for earnings.
The company is now expecting $3.70 to $3.77 in adjusted EPS versus the Marketbeat.com consensus of $3.57 and there is upside risk in the outlook.
The company is showing obvious momentum that is aided by the rollout of new offerings and cross-selling that should drive margin expansion.
The Institutions Are Scooping Up Zoom Video Communications
The institutional activity has been vigorous on both sides of the equation, but net-bullish since the IPO. The sell-side reached a crescendo in Q2 2022, but that was matched by an increase in buying that has total institutional holdings up to nearly 56%.
Based on the Q1 results, we think selling may slow down and buying pick back up and there is other big-money activity to be aware of as well. Cathie Wood and her crew at Ark Invest bought another almost-100,000 shares bringing the total held in the ARK Innovation ETF (NYSE:ARKK) up to $669 million on an as-purchased basis.
The stock is now the 3rd largest of the ETF’s holdings at 7.97%.
The Technical Outlook: Zoom Video Communications Could Gain 100% Or More
The selloff in Zoom Video Communications may not be over, but it is overextended and ripe for a reversal. When it comes, if that is not now, we see the potential for triple-digit gains in the stock.
Not only do the analysts have it pegged at $175 for a gain of 95%, but the outlook is favorable, cash flow is strong, the balance sheet is sound, and there is a relatively high short interest.
The 5% short interest isn’t enough to fuel a short-squeeze, but it is enough to get a short-covering rally started and, once begun, we see a full reversal following.
Until then, we are marking the $80 level as a possible bottom.
