Zoom Video Analysts React To Slowing Growth, Valuation Reset After Big Stock Drop

Zoom Video Communications Inc ZM shares dropped 17.4% Tuesday after the company reported yet another quarter of falling revenue growth numbers.

On Monday, Zoom Video reported adjusted third-quarter EPS of $1.11 on revenue of $1.05 billion. Both numbers exceeded consensus analyst estimates of $1.09 and $1.02 billion, respectively. Revenue was up 35% from a year ago.

While 35% revenue growth is exceptional for most companies, it marked a sharp decline from the 54% growth Zoom reported in the second quarter and the 191.3% growth it reported in the first quarter.

Zoom reported more than 2,500 customers spending at least $100,000 per year, up 94% from a year ago.

Looking ahead, Zoom guided for fourth quarter EPS of between $1.06 and $1.07 on revenue of between $1.051 billion and $1.053 billion. Analysts had expected EPS of $1.05 and revenue of $1.02 billion. Zoom’s guidance implies revenue growth will further slow to just 19%.

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Growth Headwinds: JPM analyst Patrick Walravens said Zoom’s communications platform is superb, but growth headwinds and near-term uncertainty create risk for investors.

“All things considered, we see shares as fairly valued as Zoom is expected to grow at a slower rate than the peer group,” Walravens wrote.

Wells Fargo analyst Michael Turrin said Zoom’s guidance raises questions about normalized growth rates in 2022 and beyond.

“We expect these headwinds to weigh on results over the next several qtrs, keeping shares range-bound until clearer signs around what's next for ZM post hyper-growth emerge,” Turrin wrote.

Needham analyst Ryan Koontz said he will likely stay on the sidelines until Zoom demonstrates a return to mid-single-digit quarter-over-quarter growth.

“With topline growth still weighed down by weakening trends in the micro segment from pull-forward and temporary pandemic business, we look for a clear line of sight to the growth trough,” Koontz wrote.

Phone Gaining Traction: Oppenheimer analyst Ittai Kidron said Zoom’s growing traction with Zoom Phones and Zoom Rooms was a highlight of the report.

“While we believe Zoom has multiple long-term growth opportunities (Phones, Rooms, Apps, etc.), we also believe the shares could remain under pressure near-term as its online business normalizes and investors realign expectations,” Kidron wrote.

KeyBanc analyst Steve Enders said Zoom’s churn was better than feared, and Zoom Phone, Rooms and Webinars are gaining traction.

“Enterprise remained strong with $100K revenue up ~65% y/y and $100K customers up 95% y/y (22% of rev vs. 18% a year ago), driving >10 employee rev up 6% q/q,” Enders wrote.

Opportunities Ahead: Morgan Stanley analyst Meta Marshall said investors shouldn’t overlook Zoom’s powerful combination of opportunity, positioning and valuation.

“Customer adds underwhelmed, but conversations about billings growth miss the annual nature of renewals,” Marshal wrote.

RBC Capital Markets analyst Rishi Jaluria said the third quarter was better than feared for Zoom Video, including impressive Zoom Phone numbers.

“There was certainly a lot to like, including revenue growing sequentially, healthy enterprise growth, Zoom Phone traction, and lower churn at the ≤10 employee cohort, although growth did decelerate, customer adds were light, and billings guidance was mixed,” Jaluria wrote.

Ratings And Price Targets:

• Morgan Stanley has an Overweight rating and a $365 target.
• JPM has a Market Perform rating.
• Oppenheimer has a Perform rating.
• RBC Capital Markets has an Outperform rating and a $450 target.
• Wells Fargo has an Equal Weight rating and a $245 target.
• KeyBanc has an Overweight rating and a $344 target.
• Needham has a Hold rating.

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