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Cathie Wood’s ARK Invest remains a fan of Zoom Video Communications (NASDAQ: ZM) stock. The investment firm’s Zoom Investment thesis is based on the belief that Zoom’s enterprise customers will make up most of its business by the end of 2026. Will that be enough to bring decent shareholder returns to those retail investors getting in now?
What Is Zoom Video Communications?
Zoom Video Communications, Inc. operates as a communications technology company. The company offers an easy-to-use communication platform and solutions for video meetings, phone calls, whiteboarding, and annotation for users to connect with anyone from anywhere. Zoom Video Communications serves customers worldwide.
The company soared in popularity during the work-from-home boom of the pandemic. Since then, its popularity has waned, but many businesses still favor its suite of easy-to-use communications tools, including HD video, voice, chat, webinar facilitation, and content sharing through mobile devices, desktops, laptops, telephones and conference room systems.
ZM serves the education, finance, government, and healthcare industries. Its platform helps people to connect through voice, chat, content sharing, and face-to-face video experiences. The company operates 27 co-located data centers worldwide. Its public cloud lets the company provide high-quality, high-definition, real-time video to its customers even in low-bandwidth environments.
Zoom Video Communications was founded by Eric S. Yuan in 2011 and is headquartered in San Jose, California.
On May 19, 2022, Zoom acquired Solvvy, Inc., for $121.2m in cash. Solvvy is a private tech company specializing in customer support automation, adding customer service capabilities to Zoom plus conversational AI capabilities.
Zoom appeared in last week’s VTM earnings preview.
ZM Q2 Financial Results
Zoom Video Communications reported its Q2 earnings on August 22, 2022, for the quarter ending July 2022. Company EPS results came in at $1.05, beating FactSet analyst consensus estimates of $0.95 and guidance of $0.90 to $0.92. Sadly, sales were not so encouraging. Actual sales of $1.09bn missed FactSet analyst consensus estimates of $1.11bn and guidance of $1.11bn to $1.12bn.
Q2 Total Revenues: $1.09bn
GAAP Operating Margin: 11.1%
Non-GAAP Operating Margin: 35.8%
GAAP net income: $45.7m ($0.15 per share), (-85.5% Y/Y)
Non-GAAP net income: $323.5 million ($1.05 per share), (-22.7% Y/Y)
Cash and Marketable Securities: $5.5bn
Cash Flow: $257.2m (-45% Y/Y)
Adjusted Free Cash Flow: $222.1m million (-51% Y/Y)
Several customers contributed more than $100k in trailing 12 months’ revenue, up 37% Y/Y.
Q2 saw strong growth in Zoom Meetings and Zoom Phone, coupled with contributions from Zoom Rooms and other products.
The number of Enterprise customers grew 18% Y/Y to approximately 204,100.
In Q2, the company broke its record for the largest Zoom Phone deal twice in the quarter, first with a global retailer and then with an international bank, both with more than 125,000 seats.
Big contract wins for the quarter include one of the largest US healthcare providers (as yet unnamed), who chose Zoom Meetings and Zoom Phone to provide telehealth services to their caregivers and patients.
Meanwhile, UCLA added 15k Zoom Phone licenses in Q2. And Warner Bros Discovery Inc (NASDAQ: WBD) partnered with Zoom to expand its Meetings and Phone deployment with a fully integrated suite of communication services.
Family history company Ancestry and cyber solutions business Optiv have also signed enterprise contracts with Zoom.
How Does Zoom Video Communications Make Money?
Zoom Video Communications makes money selling subscription packages to individuals and businesses. The software company offers a basic free tier with usage limitations. And for those who want more, it provides a range of plans and pricing tiers.
ZM Stock Financials
ZM stock has a price-to-earnings ratio (P/E) of 25. Its price-to-book-value (P/BV) is 4, which is well above the industry average of 0.5. ZM stock does not come with a dividend yield.
Over the past year, Zoom Video Communications Inc (ZM) has traded between $79.03 and $357.93. Today ZM shares trade at around $82. Year-to-date, ZM stock is down by -56.04%, while the S&P 500 is down by -15.97% over the same period.
FactSet analysts have a consensus Overweight rating on ZM stock with a target share price of $109.23.
China International Capital reiterated its Buy rating on ZM stock on August 24, 2022, with a ZM share price target of $125. Meanwhile, analyst Joseph Bonner at Argus Research revised his March target of $110 to $80 with a Hold rating on August 25.
Zoom Video Communications Growth Potential
Zoom products are designed to drive efficiency and cost savings within organizations. Therefore the company is hopeful that more prominent firms will begin to adopt Zoom as an alternative to dated legacy software. Certainly, this is the thesis that keeps Cathie Wood’s ARK Invest invested in ZM stock.
ARK believes most of Zoom’s business will center on enterprise customers by 2026.
Indeed, during Q4, the company had around 204.1k Enterprise customers, displaying growth of 18% Y/Y. Plus, Zoom’s CFO Kelly Steckelberg said:
Enterprise meetings, especially internationally, continues to grow and there is still significant opportunity outside of the US to continue to grow our core meetings platform.
Meanwhile, the company is focused on innovation and constantly responding to consumer wishes.
Zoom Rooms and Zoom Phone are hitting several milestones and are essential to continued growth. The company believes that cloud migration and digital transformation remain a priority even when the economy slows.
Despite its disappointing results, the company continues to sport strong margins, cash flows and cash balance.
ZM Stock Risks
Headwinds that Zoom has been facing in recent months include the strengthening dollar, weakness in new online subscriptions and, to a lesser extent, bookings breadth.
A strong dollar causes unfavorable forex conditions for certain foreign jurisdictions where Zoom operates.
Changing macro dynamics are hitting businesses hard, and Zoom is not immune. Inflation and a potential economic slowdown are factors investors should keep in mind.
The global energy crisis is another area of concern. If energy bills become too steep for consumers to manage, the work-from-home environment may come under pressure. The need for Zoom products could fall if workers head back to the office.
Furthermore, if the Russia-Ukraine war continues or worsens, leading to additional sanctions, tightened export restrictions, and more significant global economic disruptions and uncertainty, Zoom’s business and the results of operations could be materially impacted.
Should You Invest in ZM?
ARK Invest believes the online weakness Zoom has faced should peak this year. And that customer churn should settle by the end of this year. It is also impressive that Zoom’s newer products, notably Zoom Phone and Contact Centre, continue outperforming its core video communication products.
The company has lost a lot of value over the past year, so its fundamental metrics appear more reasonable than they have previously. Nevertheless, a P/E of 25 and a P/BV of 4 are not cheap. Therefore, if the market continues to feel bearish pressure, ZM stock could certainly have further to fall.
Whether you should invest in ZM stock depends on your investing time horizon and belief in its ability to grow. It doesn’t offer a dividend, so shareholders need to see sustainable growth to make investing worthwhile.
If you enjoyed our ZM stock overview, you might be interested in reading about the beauty company Coty. Read our COTY stock coverage.
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