Zoom Communications (Nasdaq: ZM) was 11% higher after its Q4 earnings report which exceeded analysts' estimates for sales and earnings. The company has been a beneficiary of the coronavirus as its usage soared for remote work and education, however, shares are off 42% from their October highs due to skepticism around maintaining growth and generating enough revenue to justify its valuation.
Inside the Numbers
In Q4, Zoom reported $1.22 in earnings per share which were significantly above consensus expectations of $0.79 per share. Revenue also beat at $882.5 million vs. $811.8 million. Revenue grew 369% compared to 2019's Q4.
This was a slight improvement from Q3's 367% growth. Of course, this isn't too surprising given the coronavirus which led to a surge in users for Zoom. Investors are closely paying attention to how much growth will slow or contract with the economy returning to normal. Due to uncertainties, many companies are not issuing guidance, however, Zoom issued a 2021 revenue forecast above expectations as it anticipates 42% revenue growth. Many analysts attribute this to the stock's big jump following earnings.
Another bright spot was gross margins expanding to 69.7% from 66.7% although this was largely attributed to declined usage during the holiday season. It also lost fewer customers than expected although churn rates remain high. The company doesn't see this changing in 2021 especially as people and businesses adjust to new conditions.
The company has 467,100 customers with more than 10 employees which are up 470% on an annualized basis, a significant improvement from 354% growth in Q3. It ended Q4 with $4.2 billion in cash a market increase from $1.9 billion last quarter.
In the next quarter, Zoom sees $0.95 to $0.97 in earnings per share and revenue between $900 million and $905 million. This would imply around 175% revenue growth as it starts having to deal with elevated comps from 2020. Analysts were looking for $0.72 per share in earnings and $829.2 million in revenue. For the full year, Zoom anticipates EPS of $3.59 to $3.65 per share and $3.76 billion to $3.78 billion in revenue. Analysts were forecasting $2.96 in EPS and $3.56 billion in revenue.
Stock Price Outlook
For Zoom, the next challenge is to show that it's able to maintain growth and offer more add-on services and features to generate more revenue. The company said that it is looking to acquire other companies who would be a good fit. It also said that it had more than 1 million seats for Zoom Phone which lets people virtually make and receive phone calls, route calls, and accept voicemail.
Given that Zoom's stock is down nearly 50% from its peak, many of these negatives are now priced in. Guidance showed that revenue growth should be around 40%. If Zoom can maintain growth and introduce new features that turn it from an app into a platform, it's likely to be a good buy at current levels. However, if Zoom can't pull this off, then it could have even more downside in the coming months.