Everyone knew the company was doing well but its results still shocked Wall Street, as the company beat estimates across all metrics and raised guidance above expectations. As a result, Zoom's stock surged by more than 40% to close at new highs.
Inside the Numbers
In its second quarter, Zoom earned $0.92 per share which was above expectations of $0.45 per share. In last year's second quarter, it earned $5.5 million, while it generated $182 million in profits in the same quarter this year.
Revenue also came in above expectations at $663.5 million vs expectations of $500 million. This was an increase of 355% which marks an acceleration from last quarter's 169%. Another meaningful improvement was that gross margins increased from 69.4% to 72.3%.
For the quarter, Zoom averaged 1.42 million users which is a 4,700% increase. It also did better than expected in converting free users into paid users and customer retention.
In terms of guidance, Zoom expects $0.73 to $0.74 earnings per share in the next quarter on revenue between $685 and $690 million which was significantly above expectations of $0.35 per share and $492 million in revenue. It also upped its full-year forecast for $2.40 to $2.47 earnings per share and $2.37 to $2.39 billion in revenue which was above consensus of $1.80 earnings per share and $1.86 billion in revenue.
Stock Price Impact
The scale of the earnings beat is the main catalyst behind the big increase in share prices. Another factor was the stock had been trading in a tight range for two months which primed it for a big move.
The stock is being repriced as it's clear its trajectory has more velocity than people believed. Growth investing is about anticipating how much a company will earn in the next 5-10 years.
If Zoom can monetize users more effectively, increase its margins, and accelerate its revenue growth, then it makes sense that its future earnings will increase as well.
From a value perspective, Zoom's price doesn't make sense. It's a $120 billion company with $2.4 billion in revenue. However, investors are willing to pay a premium for the stock, because it has a dominant position in videoconferencing which has the potential to be a major market like search or social.