Now Zoom Video Communications Inc. Faced with its first earnings report comparing results to a full pandemic quarter, investors are looking more to the future.
Since hitting its all-time high of $568.34 on October 19, 2020, the stock is down more than 40% as investors worry about results looking less impressive compared to those pandemic spikes. Sentiment seemed to change a bit this week, however, with stocks gaining 1.2% for the week after dropping 5.2% and 7.4% respectively in the previous two weeks.
Morgan Stanley analyst Meta Marshall upgraded Zoom from equal weight to overweight on Thursday and raised its price target from $360 to $400, with the expectation that a gain of 5% or more from the company would “provoke a positive reaction for the stock.” Marshall also sees Zoom’s plan to sell Five9 Inc. FIVN to buy,
for $14.7 billion as positive.
Before the upgrade, Marshall said the checks were “positively skewed” after Zoom’s latest earnings report, and with plans to expand with Five9 and accelerate Zoom Phone adoption traction, customer churn is becoming less of a concern, especially with a COVID flare-up. -19 cases due to the delta variant.
“While valuation continues to recognize sustained growth of ~22x EV/FY23e sales, we’re hearing less concerns about churn in FY22, especially as return-to-work initiatives have slowed,” Marshall said.
On last check, Zoom’s enterprise value-to-sales ratio, or EV-to-sales, stood at 29.5, a far cry from the ratio of 49 when the company first went public. At the time, that 49 gave Zoom the award of the highest EV-to-sales from a US tech company worth more than $500 million. That distinction now goes to companies like CrowdStrike Holdings Inc. CRWD,
and Zscaler Inc. ZS,
both of which have an EV-to-sales ratio of over 60, according to data from FactSet.
What to look for
Income: Of the 21 analysts surveyed by FactSet, Zoom expects an average of adjusted earnings of $1.16 per share. That’s higher than the 96 cents per share expected at the start of the quarter and last year’s 92 cents per share. Zoom forecast earnings of $1.14 to $1.15 per share. Estimize, a software platform that uses crowdsourcing from hedge fund managers, brokers, buy-side analysts and others, is asking for earnings of $1.27 per share.
Gain: Of the 20 analysts surveyed, Zoom is expected to report revenue of $991.2 million. That’s more than the $934.9 million estimated at the beginning of the quarter and $663.5 million last year. Zoom forecast revenue of $985 million to $990 million for the second quarter. Estimize expects sales of $1.01 billion.
Stock movement: Since Zoom began reporting results more than two years ago, the company has beaten Wall Street earnings estimates by 5% or more and earnings per share estimates by 30% or more. The day after the earnings report, stocks are closed half the time and have fallen after the past three quarterly reports.
In the past 12 months, Zoom shares are up 16%, while the S&P 500 index SPX,
is up 20% and the tech-heavy Nasdaq Composite Index COMP,
has progressed 17%.
What analysts say
JP Morgan analyst Sterling Auty, who has a neutral rating, said Zoom’s daily active users and downloads have declined since their September peak, but that “it is too difficult to determine how many users have reduced activity enough to either move to a offering or canceling some seats within an account for free.”
“We think business users who pay for a license are likely to keep it if they still use video conferencing a few times a week or more,” Auty said. “The only area likely to be more volatile in terms of churn is the accounts with less than 10 employees that also include consumer use cases.”
JMP analyst Patrick Walravens, who has a hold rating on the stock, said Zoom’s smaller customers will likely be the biggest source of churn, and the company’s biggest threat comes from Microsoft Corp.’s MSFT.
“Before the pandemic, revenues from customers with one to 10 employees represented about 20% of the total company,” Walravens said. “As of F1Q22, this customer segment represented 37% of total revenue. While we do not expect increased churn levels in the customer segment with more than 10 employees, it is likely that the segment from 1 to 10 will experience churn.
Piper Sandler analyst James Fish, who has an overweight rating on Zoom and a price target of $464, said he expects revenues to exceed $1 billion for another quarter of 50% or more growth.
“Investors will likely be focused on Zoom Phone’s success, with expected net additions of +0.5 million or >2 million Zoom Phone licenses to the market,” said Fish. “However, most investors forget that this attachment will potentially lead to higher Meetings seats.”
KeyBanc Capital Markets analyst Steve Enders, who has a buy rating and a price target of $428, said Zoom’s sales are “starting to normalize from outsized levels in FY21,” so it’s more a matter of how big the beat is.
Enders expects investors to be more focused on how Zoom plans to grow beyond its core video conferencing and how management is commenting on the adoption of Zoom Phone, Zoom Apps, Zoom Events, as well as the upcoming acquisition of Five9.
Of the 28 analysts covering Zoom Video, 15 have a buy or overweight rating, 11 a hold rating and two a sell or underweight rating, with an average price target of $415.40, according to data from FactSet.