Zoom Communications
It's likely that some growth investors dumped shares as revenue is starting to decelerate following the massive acceleration due to the coronavirus. Further, there's been a rotation in the market away from coronavirus winners like Zoom to the losers like airlines, hotels, and casinos.
Inside the Numbers
In Q3, Zoom earned $0.99 per share which was meaningfully higher than analysts' expectations of $0.76 per share. Additionally, revenue came in at $777 million vs $694 million. This was a 367% increase from 2019's Q3.
One negative was the decline in gross margin from 66.7% to 67.3%. Somes of this was due to heavier use of Zoom by teachers and students which is a lower-margin offering than its business products. Zoom also incurred higher than expected cloud hosting expenses due to heavier use of its free product.
80% of the increase in revenue came from new customers. North American revenue increased by 300%, while international revenue grew 629%. Enterprise customers which entails companies with over 10 employees increased by 485% to 433,700. The company also said it's adding a Zoom app to smart home devices made by Amazon
Guidance was better than expected with the company projecting earnings of $0.78 per share on revenue of $810 million in Q4. This would be revenue growth of 329% from Q4 which marks a deceleration from Q3. Both figures were higher than what analysts were looking for $0.66 per share and $730 million.
Stock Price Impact
Zoom is one of the best-performing stocks of the year. It was a major beneficiary of the pandemic as people were forced to work and communicate through video. This is reflected in its performance from the start of the year to its peak in October it gained 767%. Since then, it's down 31%.
The major catalyst for the decline has been the vaccine which is leading to increasing optimism that the world is going to return to normal which would mean that offices and schools would reopen and business travel would return. This would lead to less use of Zoom.
So, Zoom is in the interesting place, where due to rising case counts in the near-term, use of its platform is growing. However, the stock is going down due to anticipation that revenue growth will slow or even reverse in the intermediate-term. Yet, it's also true that the use of video-conferencing will only increase in the future which means that at some point, the decline in Zoom will get to a point, where the stock becomes attractive again. However, this could be more than a year away as the stock remains overvalued by any measure.
