ZM Stock Overview
Zoom Video Communications, Inc. provides unified communications platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.
No risks detected for ZM from our risk checks.
Zoom Video Communications, Inc. Competitors
Price History & Performance
|Historical stock prices|
|Current Share Price||US$73.59|
|52 Week High||US$291.31|
|52 Week Low||US$72.96|
|1 Month Change||-8.47%|
|3 Month Change||-33.68%|
|1 Year Change||-72.49%|
|3 Year Change||-3.84%|
|5 Year Change||n/a|
|Change since IPO||18.69%|
Recent News & Updates
Zoom: The Struggle Will Likely Continue With The Coming Recession
Summary ZM stock has collapsed dramatically from its recent July highs, decisively breaking below its previous May lows. Therefore, it appears the worst is not over yet for Zoom. Our analysis suggests that the market has likely anticipated further headwinds in its SMB segment, given the recession headwinds. Therefore, the selloff is justified. Investors need to ask whether the discount in ZM is sufficient for them to bet on a potential recovery through 2024. Given the tech rout, we believe that there are plenty of higher-quality growth stocks in the market. Zoom could continue to struggle even at the current valuations. Thesis Zoom Video Communications, Inc. (ZM) stock surged to a recent high in July but has since collapsed dramatically, breaking below its May lows. In our previous update, we urged investors to sell, suggesting that the stock has not capitulated. Notwithstanding, our timing could have been better, given its July surge, but ZM has not convinced us that investors should add exposure even though it has been battered profusely. We believe that the digestion in Zoom's small and medium business ((SMB)) segment is still ongoing, exacerbated by the recessionary headwinds. It also led to the company revising its Q3 forecasts in August. However, we believe the market has likely priced in further headwinds, which could further delay the inflection point in its SMB/online segment. Furthermore, while its enterprise momentum has been pretty robust in Q2, Zoom will come under pressure to maintain its cadence in H2. Given its ex-US exposure and intense competition with SaaS behemoth Microsoft (MSFT), we postulate that further cuts in Zoom's earnings estimates could occur. Accordingly, we deduce that the continued weakness seen in ZM reflects the anticipation of the market, suggesting lowered confidence in Zoom meeting its H2 guidance. Notwithstanding, we gleaned that ZM seemed to be consolidating at the current levels, complicating a sell entry. Therefore, investors looking to unload exposure should consider waiting for a relief rally first to improve their exit points. As such, we revise our rating on ZM from Sell to Hold for now. At 11.2x NTM EBITDA, ZM's Valuation Seems Well-Battered ZM NTM EBITDA multiples valuation trend (koyfin) ZM's meteoric rise and spectacular fall, all within three years, will likely be used as an excellent case study on the bursting of "bubble" stocks that rode their one-off tailwind through the COVID pandemic. As seen above, ZM's NTM EBITDA multiples have continued their fall from the sky, touching the 11.2x levels at the one standard deviation zone under its mean. The question is whether ZM is cheap relative to its peers at the current levels. MSFT's 16x NTM EBITDA represents a 43% premium against ZM's valuation. However, the King of SaaS is a formidable long-term return compounder for investors, with a wide competitive moat and well-diversified revenue streams. Therefore, we believe investors need to ask whether the discount in ZM is sufficient to justify adding exposure at the current levels, to bet on its medium-term recovery. We don't think it's a good idea yet, even at the current levels. Not Cheap Enough For Low-Growth Estimates Zoom Revenue change % and Adjusted EBIT change % consensus estimates (S&P Cap IQ) The consensus estimates (neutral) suggest that Zoom's revenue and adjusted EBIT growth profile could likely bottom out in FQ3 before recovering through 2023. But a 10% growth by CQ3'23 is nothing to shout about for a growth stock. Notwithstanding, the bottoming process should help stanch a further decline in ZM. However, the price action over the past month suggests that the market remains unconvinced about Zoom's potential recovery, given the worsening macro headwinds on its SMB segment. As a result, we believe that ZM's valuations need to be digested further to account for potentially lower growth estimates.
Zoom: Likely Overvalued As Microsoft Teams Dominates
Summary From the user’s perspective, Zoom’s quality is generally not materially differentiated from Microsoft Teams. However, the corporate decision-making process makes it easier to select Microsoft Teams as the vendor. Zoom’s non-enterprise revenue declined 10% YoY in the latest quarter and overall number of customers is stagnant while Microsoft Teams grew during the same period. This stock is likely richly valued if management does not pull a rabbit out of the hat soon. The analysis from other contributors regarding Zoom (NASDAQ:ZM) has mostly been from the financial perspective. But the financial perspective doesn’t always tell how the business is directed, especially when the industry is fast paced, as it is backward rather than forward looking. In Zoom’s case, it appears to be that Microsoft (MSFT) has the dominant advantage and Zoom’s chances of further grow are slim. Maybe in a better economic environment it could be acquired by an aspiring competitor, but on a standalone basis it appears it will likely be headed for difficult times. I support this assertion with the following observations: The user perspective: What’s lacking from the financial perspective is the user’s perspective. From a corporate user’s perspective, Microsoft Teams is good for not just holding meetings, but also creating collaborative workgroups, sharing files etc., in other words, everything needed to work collaboratively to solve a work problem. As Microsoft Team’s tagline goes (paraphrased) “Meetings are just another tool” (I’m not sure if the MS team had a competitor in mind when they came up with this motto) but it's definitely quite valid. Zoom also has collaborative functions etc but from the user’s perspective it feels the Microsoft Teams works more seamlessly with the other Microsoft tools. Even if you don’t agree with this assertion, the quality of both services is at least largely equal, without much of an edge to Zoom (if any). Microsoft is in a must-win battle and the tech is not rocket science: The work arena solutions is integral to Microsoft, so Microsoft is not going to cede ground on it. If Microsoft loses the video conferencing arena, then that could lead to a domino effect (cloud services etc), so naturally Microsoft will fight tooth and nail. The tech is not rocket science: Apparently it wasn’t too hard for Microsoft to launch and grow Teams to 270 million monthly active users. As the tech is not too hard, Zoom cannot rely on tech as a moat. User stickiness is low but organizational stickiness is high: By low user stickiness, I mean the average user can send a conference call link in Zoom, Cisco Webex, Teams, whatever suits the situation. Send a few links using any platform and you’ll be used to using it. There is very little user stickiness. More importantly, many users (especially those working at slightly bigger corporates) don’t get to choose their preferred app – the organization they work at does the choosing for them. Organization stickiness is high as customer captivity and switching costs are high, because large companies are IT-risk conscious nowadays, which means it is a pain to get approval for each new app to install on all computers. It’s much easier to just rely on a trusted large brand and get approval for a new service from Microsoft (hey, it’s Microsoft after all, and if it doesn’t work, don’t blame me!) than go through the hassle of getting approval for one app just for video conferencing (not to mention the extra personal career risk from recommending these non-big player suppliers, one security breach from a non-big player supplier and that guy who recommended it would be getting a lot of “I told you so” from the entire organization). This might be what Charlie Munger calls the “institutional imperative”, however given the fact that the main videoconferencing apps are not that far apart from each other in terms of quality, the institutional imperative will take over when it comes to deciding which provider to choose. Network externalities: Microsoft also has network externalities working for it. A big corporate uses Microsoft teams and then the meeting invites it sends to its customers/vendors will also be using Microsoft Teams. So after a while, even smaller companies get used to using Microsoft Teams so they can do business with larger companies. This “viral” form of spread is very beneficial to Microsoft but makes life harder for Zoom. Large organizations often choose different video conferencing vendors for different reasons, for example some very large corporations might not be able to open a Zoom link because their security department blacklisted it. Eventually everyone will just literally meet at what’s workable for everyone and I foresee that will be Microsoft (or Cisco etc). If some organization doesn’t use Microsoft Teams, it’ll end up getting complaints from its customers/vendors about what they think is wrong with Microsoft Teams that they can’t use it when just about everybody does? Hard for an IT security department to argue with that! I want to make it extra clear that I am not being negative about the Zoom product or company. I used it and was quite fascinated with how well it worked at the start of the Coronavirus pandemic. While we all love to root for the little guy, however, in this case, the economics are heavily stacked against it and it is likely Microsoft will dominate this niche. The above is just user experience and observations. Next let’s see how the numbers stack up. Flatlined revenues over 5 quarters: Zoom’s revenues have flatlined in the past 5 quarters as shown below. Now I can give a growth stock (priced at 6X sales) the benefit of doubt if it’s had a rough quarter or two. But this is 5 consecutive quarters! GAAP operating income has plummeted in those 5 quarters, though Non-GAAP operating income is only slightly down (difference between GAAP and non-GAAP is mainly due to higher share based payment costs). Zoom Quarterly revenue, GAAP and non-GAAP operating income Zoom quarterly revenue, GAAP and nonGAAP income (zoom investor presentation) Source: Zoom investor presentation Note that Zoom has a January year-end, so Q2 FY23 ended in July-22 and Q4-FY22 ended in Jan-22. So how has Zoom’s nemesis fared in the same period? We can’t really see revenue but we can compare user numbers. Though Microsoft Team’s monthly active users is not an apples to apples comparison with Zoom’s customers > 10 employees, it’s the only metric we have, and it’s probably indicative enough of the overall trend. Since Sep-20 Microsoft Teams’ metric has grown faster than Zoom, especially during 2021, where Microsoft almost doubled its users from Mar-21 to Dec-21 while Zoom flatlined during that entire period. Users comparison Microsoft Teams Q1-FY21 (Sep-20) Q3-FY21 (Mar-21) Q4-FY21 (Jun-21) Q2-FY22 (Dec-21) monthly active users 115 million 145 million 250 million 270 million Not further disclosed Growth rate (%) n/a 26% 72% 8% Zoom Q3-FY21 (Oct-20) Q1-FY22 (Apr-21) Q2-FY22 (Jul-21) Q4-FY22 (Jan-22) Q1-FY23 Q2-FY23 Customers > 10 employees 433,700 497,000 504,900 509,800 502,400 492,500 Growth rate (%) n/a 15% 1.5% 1% -1.5% -2% Source: Author, with data from Zoom investor presentations and Microsoft earnings calls Non-enterprise revenue declined 10% YoY: Zoom’s revenue is growing increasingly reliant on enterprise revenue, as total revenues increased by 8% and enterprise revenues increased by 27%, which works out actually a YoY decline for non-enterprise revenues from $548m to $500m - almost a 10% YoY decline! This means Zoom is getting more reliant on enterprise customers but as we see above, this will be facing very stiff competition from Microsoft Teams. Zoom quarterly revenue (zoom investor presentation) zoom quarterly enterprise revenue (zoom investor presentation)
Zoom Video Communications: Miscommunication
Summary Zoom is able to maintain, or still slightly increase its revenues. This is about the good news as the company sees severe margin pressure, driven by an increase in operating expenses and stock-based compensation. This margin pressure is so severe that realistic earnings have fallen to the break-even line. Given these flattish realistic earnings, there is little fundamental support here, as many margin questions remain. Shares of Zoom Communications (ZM) have seen a retest of the lows around the $80 mark as the latest set of quarterly results, including a poor margin outlook, set investors up for a new disappointment. In March of this year I believed it was time to call as the downfall in the shares of Zoom made that shares fell to their double-digits, as I thought that valuations have been de-risked in quite a major way, making that appeal was slowly starting to emerge. Some Background Zoom went public in 2019 and shares traded around the $60 mark soon after the offering, actually hitting the $100 mark, as this was a time when the company was much smaller of course. The company has been a poster child of the pandemic as shares hit the $500 mark in October of the year with the $3.5 billion sales run rate for the year being roughly 4 times the original revenue guidance! The company guided for 2021 sales to rise in a modest fashion to $4.0 billion and unlike so many technology names (at the time) the company was hugely profitable with GAAP profit margins exceeding 20%, still translating into a 100 times earnings multiple, with the business supporting a hundred billion valuation at the time on the back of a 25 times sales multiple. Optimism fueled Zoom into pursuing a $14.7 billion deal for Five9 last summer as it all went downhill from there, even as that deal fell through, and the company continued to hold a very substantial net cash position. Shares kept falling amidst a normalization of valuations, retreat of the pandemic, and fears of competitive pressure, with names like Microsoft (MSFT) offering cheaper similar services as well. Valuation Reset By March shares fell to the $100 mark, down 80% from the highs, as that move is even an under reaction given the net cash position held by the company. Early in 2022, the company posted its fourth quarter results with revenues up 21% to $1.07 billion, with GAAP operating profits of $252 million being strong. Non-GAAP earnings came in at $1.29 per share, yet adjusting for stock-based compensation expenses, I pegged realistic earnings closer to $3 per share. For the upcoming fiscal year of 2023, the company guided for revenues at a midpoint of $4.54 billion, suggesting modest growth from the $4.10 billion in revenues reported in the fiscal year 2022. Adjusted earnings are set to rise from $3.34 per share to $3.48 per share, yet after backing out stock-based compensation I see realistic earnings closer to just $2.50 per share. The 306 million shares valued equity of the company at $30 billion in March, or $25 billion if I factor in net cash. This still comes in at 5-6 times sales but low thirty times realistic earnings multiple. These multiples are quite demanding in order to get upbeat on the name and while revenue numbers looks reasonable, the margins were deteriorating. While this was largely a pandemic play, its services would still be used in a post-pandemic world, as there were many balancing acts including a more modest valuation, but on the other hand fierce competition and potential for M&A as well. What Now? Since my take in March, shares have largely traded in an $80-$120 price range, now trading towards the low end of the range following the latest quarterly results. In May, Zoom posted a 12% increase in first quarter sales to $1.08 billion. That was about the good news as GAAP operating margins took a beating, with GAAP operating profits down from $226 million to $187 million. Following some losses on investments, the company saw GAAP earnings cut in half to $0.37 per share as non-GAAP earnings fell thirty cents to $1.03 per share, excluding stock-based compensation expenses which doubled. While a more than $3.70 per share guidance in adjusted earnings sounds upbeat, stock-based compensation is on the increase, so that is not that meaningful to me. In August, Zoom saw sales growth decelerate to 8%, although a strong dollar is hurting the business, all while margin pressure is only on the increase. Second quarter operating profits fell from $295 million last year to just $122 million, with quarterly stock-based compensation expense increasing to just over a quarter of a billion, allowing adjusted earnings to come in at $1.05 per share. The 307 million shares have now fallen to $80 per share, for a market valuation of just over $24 billion, as the operating assets are valued at around $19 billion here. This reduces the sales multiple to 4-5 times, even if the full year sales guidance has been cut by $150 million to $4.39 billion.
|ZM||US Software||US Market|
Return vs Industry: ZM underperformed the US Software industry which returned -30.9% over the past year.
Return vs Market: ZM underperformed the US Market which returned -21.5% over the past year.
|ZM Average Weekly Movement||9.0%|
|Software Industry Average Movement||8.9%|
|Market Average Movement||6.9%|
|10% most volatile stocks in US Market||15.6%|
|10% least volatile stocks in US Market||2.8%|
Stable Share Price: ZM is not significantly more volatile than the rest of US stocks over the past 3 months, typically moving +/- 9% a week.
Volatility Over Time: ZM's weekly volatility (9%) has been stable over the past year.
About the Company
Zoom Video Communications, Inc. provides unified communications platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The company offers Zoom Meetings that offers HD video, voice, chat, and content sharing through mobile devices, desktops, laptops, telephones, and conference room systems; Zoom Phone, an enterprise cloud phone system; and Zoom Chat enables users to share messages, images, audio files, and content in desktop, laptop, tablet, and mobile devices. It also provides Zoom Rooms, a software-based conference room system; Zoom Hardware-as-a-Service allows users to access video communication technology from third party equipment; Zoom Conference Room Connector, a gateway for SIP/H.323 endpoints to join Zoom meetings; Zoom Events, which enables users to manage and host internal and external virtual events; OnZoom, a prosumer-focused virtual event platform and marketplace for Zoom users to create, host, and monetize online events; and Zoom Webinars to provide video presentations to large audiences from many devices.
Zoom Video Communications, Inc. Fundamentals Summary
|ZM fundamental statistics|
Is ZM overvalued?See Fair Value and valuation analysis
Earnings & Revenue
|ZM income statement (TTM)|
|Cost of Revenue||US$1.06b|
Last Reported Earnings
Jul 31, 2022
Next Earnings Date
|Earnings per share (EPS)||3.33|
|Net Profit Margin||23.05%|
How did ZM perform over the long term?See historical performance and comparison