Zoom (ZM), the leading video conferencing software company just reported its latest Q3 earnings and the stock dropped more than 10%, the stock is now down 38% YTD while the Nasdaq is up 22%. The company’s third quarter’s revenue was $1.05 billion, up 35% year over year. Income from operations was $290.9 million, up from $192.2 million in the prior year. GAAP operating margin was 27.7% and non-GAAP operating margin was 39.1%, the company also generated $374.8 million free cash flow during the quarter. Revenue guidance for Q4 is $1.05 billion which implies 20% year over year growth.
The numbers are actually pretty decent given the easing in lockdown all over the world. The company also continued to prove that it is able to generate income unlike a lot of other high-growth tech stocks. Guidance is a bit disappointing but the management team is probably being conservative here as the covid situation may fluctuate a lot during the quarter. One of the most important metrics in my opinion is the number of customers contributing more than $100,000. The number this quarter is 2,507 which is up 94% year over year, this proves that more enterprises customers are using their products and some previous customers are now spending more. This is important because enterprise customers will be Zoom’s key focus going onwards as the spending of these customers tends to be a lot more stable compared to individual customers.
There is a lot of discussion about competition from Microsoft’s Teams (MSFT) and according to Gartner’s report, Zoom and Teams are currently the leader in the space which is quite expected. This will probably turn out to be a duopoly situation, where Zoom has an advantage on UX while Teams have an advantage on pricing. Video conferencing is a very large space and there is certainly enough space for two leaders to co-exist.
After the drop, Zoom currently stock price implies an Fwd PE of 45 which is surprisingly reasonable when a lot of tech stocks like Intuit (INTU), Adobe (ADBE), and Salesforce (CRM) are all trading at around 50–70 PE with a similar or even slower growth rate. This is one of the most polarizing stocks in the market but I think the stock has more upside than downside at this price point as a lot of bad news such as pandemic easing has already priced in. Besides with or without covid, a lot of companies especially enterprises will probably choose to adopt the hybrid work mode going onwards as it is more flexible and allow companies to cut cost on unnecessary office space. If you believe that the hybrid work mode will stay even after covid then Zoom’s current stock price may be a great entry point.
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