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Bull of the Day: Zoom Video (ZM)

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Benjamin Rains
·6 min read
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Remote work and schooling thrust Zoom Video Communications, Inc. (ZM) into the spotlight last March and its stock soared for months. The video conferencing platform’s shares have pulled back significantly since October, and Wall Street is currently assessing how the rollout of the coronavirus vaccine will impact Zoom.

Despite one-hit-wonder worries, Zoom was growing before the lockdowns. And no matter what the world looks like by the summer, it seems relatively safe to say that more people will be working remotely in at least some capacity, as the long-talked about work-from-anywhere business environment begins.

Video Conferencing Future

Zoom had steadily grown its business-focused video communication platform since its founding in 2011, within a somewhat crowded space. The company then went public in April 2019 and found early success, before falling back to its early trading levels by the end of 2019. Still, ZM posted strong growth in its first year as a public company, with its fiscal 2020 revenue up 88% to $623 million for the period ended on January 31, 2020.

Then the world changed as lockdowns and social distancing forced companies and people everywhere to find ways to continue working and stay in touch. The company’s relatively easy to use cloud-based video conferencing offerings that can be used across an array of devices became a hit and a verb nearly overnight.

Luckily, ZM’s revenue comes from subscription-based paying customers, which means it doesn’t really matter that many people stopped doing family and friends Zoom calls months ago. The company offers an array of communication services and various tiers geared to different size businesses, as well as educational-focused offerings.

Even as more people return to offices around the U.S. and the world, Zoom’s offerings are still being utilized nearly non-stop in the current remote work and learning environment. And the possibility of businesses remaining in their current remote capacity in the near-term is realistic, especially for many professional services firms in big cities, where public transportation, elevators, and more hamper reopening plans.

What’s Next?

Hopefully the vaccines help life return to something far closer to normal later this year. This means that Zoom’s long-term success hinges on the official arrival of the work-from-anywhere age.

The U.S. economy is bouncing back and corporate earnings have come in far better-than-projected, even as millions of people continue to work from home. The reason is simple: so much work was being done digitally already and the proliferation of business software, SaaS, cloud computing, and more created a relativity seamless transition.

This could propel companies to permanently cut back on rent and commercial real estate expenses. Some big companies have already committed to larger-scale remote work plans and hybrid environments. And something like three days in the office and two out, could become permanent.

The pandemic might have also helped normalize fewer work trips, which offers companies the chance to save money. And as the clean energy push grows, firms might use business travel as a simple way to reduce their environmental impact—ZM highlighted the green angle before the pandemic.

Zoom knows that the current environment won’t last forever, but executives are already pretty sure the business world might have reached an inflection point. Zoom has introduced hardware offerings for homes and offices in collaboration with other tech companies. And on February 3 it announced “the general availability of Zoom Rooms innovations that will help organizations safely re-enter the office and sustain an “everywhere workforce.”

Other Fundamentals

ZM is ready to help companies with a hybrid environment and it cited a study that over 80% of employees working remotely hope to continue to “work remotely at least 50% or more once they do return to the office.” It’s not just Zoom talking up the possibilities, Verizon (VZ) bought video conferencing firm BlueJeans last year and Salesforce (CRM) paid $28 billion for Slack (WORK)—which is the second-largest deal in software history.

Zoom’s revenue jumped by 80% in Q4 FY20 (before the pandemic), it then soared 170% in Q1, 355% in Q2, and 367% last quarter. ZM saw its customers with more than 10 employees skyrocket 485% to over 433,000, while its users contributing over $100,000 in trailing 12 months revenue jumped 140%. And executives provided upbeat guidance in early December.

Zacks estimates call for Zoom’s adjusted Q4 earnings to jump 420% to $0.78 a share on 330% stronger sales. The company is then projected to grow its sales by 153% in the first quarter of FY22 to lift its bottom line by another 270%.

Overall, the video conferencing firm’s full-year fiscal 2021 earnings are projected to climb 725% from $0.35 a share in the year-ago period to $2.89. Meanwhile, its pandemic-fueled year is expected to help its revenue climb 314% from $623 million to $2.58 billion.

Clearly, it would be nearly impossible to come anywhere near matching FY21’s growth. Nonetheless, Zoom’s sales are projected to jump another 37% or $1 billion above our current year estimate to $3.53 billion in fiscal 2022 and its adjusted earnings are projected to climb slightly.

As we mentioned at the top, ZM shares have come back to earth over the last few months, down 35% from its October highs of over $570 a share to around $390 at the close of regular trading Thursday. The pullback has created opportunity for Zoom and proven there’s still appetite.

ZM raised $2 billion by selling more stock at $340 a share in an offering that closed in mid-January to help support its rapid expansion and help it fight against Cisco’s (CSCO) Webex, Microsoft’s (MSFT) Teams, and others.

ZM stock has climbed 15% since January 12, and Zoom remains far from overbought in terms of the Relative Strength Index, with ZM sitting at around 53—an RSI above 70 is often regarded as overbought, with any number below 30 considered oversold.

Analyst have also remained high on Zoom, with the current consensus price target Zacks has accumulated at $468 a share, 20% above its current levels. And the stock has broken above its 50-day moving average to start February after failing to break through the resistance level twice in January.

Bottom Line

Zoom’s positive earnings revisions help it land a Zacks Rank #1 (Strong Buy) at the moment, alongside its “A” grade for Growth in our Style Scores system. The company has topped our bottom-line estimates by an average of 90% in the trailing four quarters and it will report its Q4 results on March 1.

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