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Zoom falls despite reporting blockbuster Q3 results

Zoom is falling despite reporting third quarter earnings that surpassed expectations. Wedbush Securities Chief Technology Strategist Brad Gastwirth joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We are watching shares of Zoom today take a dive in this session, down about 14%, this despite the company's most recent quarter, seeing revenue growth of 367%. Let's bring in Brad Gastwirth. He is Wedbush Securities chief technology strategist.

And Brad, it's always good to talk to you. Let's start with the stock move right now because it seems like the concern is about declining gross margins, this concern that there's a lot more free users that Zoom is relying on. How much of this stock move do you think is actually justified-- a 14% hit today?

BRAD GASTWIRTH: Yeah, I mean, it's certainly-- the good news is being sold. I think there was very lofty expectations going into this report. They've really executed phenomenally well-- I mean, having over 300% revenue growth. The guidance was significantly better. The whispered number was slightly higher than where they'd printed, and you know, the stock's getting punished.

That being said, this is a company with over $100 billion market cap that it's-- you know, just two years ago, the whole size of the enterprise videoconferencing market was $2 billion. So the stock's performed quite well. It makes sense that it pulls back. Nothing goes up linearly. But the numbers are very strong.

ZACK GUZMAN: Yeah, I mean, should-- is that how we should be looking at it, just a pullback, or is this the beginning of something else? Because you're right. I mean, when you think about how strong the numbers are, 367% growth, topping what they did last quarter, 355%, before that, 169%. I mean, sure, maybe it's a little bit of a teetering out, you could say. But what do you make of maybe the expectation that, look, the idea that Zoom's rally is now over for good, how overblown are we talking here?

BRAD GASTWIRTH: Yeah, and then you brought up some really good points that I think a lot of people probably missed. There was an acceleration in growth, and I think a lot of people did miss that point. So it's really hard to tell, you know, is this growth engine over? We've already seen this company get to valuations that are completely uncharted.

Now, I'm a proponent of valuation alone is never a reason to buy or sell a stock. That being said, when you have over $100 billion market cap and even some of the latest enterprise collaboration market analysis is in the $50 to $80 billion range, you have a market cap significantly north of what some of the addressable market is. I think it got a little bit ahead of itself.

So to me, the big question now is, you know, we know that they're leader in video conferencing. They are by far the leader. They have a better solution, and they've executed. The next question now is, will they be able to innovate and grow in other areas that people have not expected them to do so? Well, it will remain to be seen, but they need to do that to keep his valuation.

ZACK GUZMAN: And on that front, we have seen a number of services-- or new services-- launch from Zoom. We're looking at Zoom for smart-home devices as well as OnZoom, which is more of an event-type platform where people would actually pay to enter. I mean, how big of a driver do you think those two areas are likely to be? Is this kind of the direction that we should see Zoom going in?

BRAD GASTWIRTH: Yeah, it's an excellent point. They are going after new markets, and they are starting to come up with these new service offerings. They need to be successful, again, to keep the valuation. When you enter the $100 billion market cap companies, you're in a very special field. The company, again, is really solving a huge problem on a global basis, and they're the best of breed. That being said, they do need to innovate, and they need to continue to offer value-added services to keep the valuation at this type of level.

So will those services be enough? I think they're interesting offerings. I don't think those markets alone are going to be the one that defines it to that next leg of growth, but I think they will innovate. The question will be will it be big enough to be able to maintain this type of valuation.

AKIKO FUJITA: Right, so when you were saying you don't want to buy stocks based solely on valuation, talk to me about buying companies. Because when we look at what's gone on with Slack here now, "Wall Street Journal" saying that it could be high-- the high $20 billion level here when we're talking about where the actual final price might be. What do you see in that acquisition and what it brings to the table and Salesforce trying to package all this together in this new normal versus return to normal, however you want to word it? Where do you see this going?

BRAD GASTWIRTH: And what-- and great question and it's certainly on a lot of people's minds, and it's a topic du jour today. I think it's very-- it's-- simply put, Microsoft was doing incredibly well with teams. They had a free offering that competed with Slack. I think Slack tried to sell themselves in the best market that they could, and they found a buyer within Salesforce.

So I think Salesforce wraps into an interesting acquisition. I think Microsoft is still-- I mean, they were doing incredibly well prior to the pandemic hitting. They are gaining share with the Office 365 suite and allowing teams in-- mostly as an add-on for free.

I think Slack, outside of the pandemic, was really in between a rock and a hard place. I think this is a good move for them to allow some shareholder liquidity. But for Salesforce, I don't personally love the acquisition. I don't see how they really leverage it tremendously. And you know, I think this was trying to, you know, sort of steal Microsoft's thunder because they've been doing so well, but Microsoft is still executing well. Slack got rid of, you know, themselves, and I think it was a smart move at this time current time.

ZACK GUZMAN: Yeah, it'll be interesting to see if this fuels more consolidation in the space. It does feel like it's increasingly an arms race, especially in enterprise software. Brad Gastwirth, chief technology strategist said Wedbush Securities, it's good to talk to you today.

BRAD GASTWIRTH: Thank you.