With the release of news that a Covid-19 vaccine was on the way late last year, there was a huge rebound in the share prices of companies associated with “reopening”.
Airlines, casinos and cruise ship operators all saw their stocks receive a boost. But what about the pandemic’s “stay-at-home” winners?
One of the best-known and also most widely-recognised names in the stay-home space is Zoom Video Communications Inc (NASDAQ: ZM).
The cloud-based video conferencing firm saw an unprecedented boost in demand as countries worldwide went into lockdown.
For Zoom’s Fiscal Year (FY) 2021 (for the 12 months ending 31 January 2021), the company reported an unbelievable 326% year-on-year rise in revenue to US$2.65 billion.
Naturally, meeting expectations this year was always going to be harder. Last week, Zoom reported its fiscal second-quarter FY 2022 earnings and the stock subsequently fell around 17%.
Yet, was this steep sell-off justified by the numbers or was it an overreaction on the part of the market. More importantly for investors in Zoom, does it still remain a buy?
Story remains the same
While Zoom bears like to talk up the doomsday effect of pandemic comps that the company faced as it lapped its FY 2021 numbers, the reality is that the latest earnings continued to highlight a strong business.
Zoom posted revenue growth of 54% year-on-year for its latest quarter as quarterly sales passed the US$1 billion for the first time (US$1.02 billion).
Yet given the 355% year-on-year revenue growth seen in Q2 FY 2021, 54% for the latest quarter on top of that 355% from last year is an impressive feat.
What disappointed the market was the essentially flat sequential revenue growth for the fiscal third quarter while guidance for the full fiscal year also remained conservative at about US$4 billion.
Numbers don’t lie
While management did highlight that customers with fewer than 10 employees were starting to see churn, this was more than offset by a 36% year-on-year rise in the number of customers with more than 10 employees, to around 505,000.
Given this cohort of customers makes up nearly two-third of revenue for Zoom, it’s an important distinction to make when assessing the overall churn Zoom is witnessing.
This fact was more than backed up by the company’s dollar-based net expansion rate, which was over 130% for the 13th consecutive quarter.
Essentially, what this means is that even if Zoom doesn’t take on any new customers going forward (which isn’t likely), existing customers are still spending 30% more than they did over the trailing 12-month period.
Building out a platform
For investors looking at the long term, Zoom’s ambitions have always been clear; it wants to “own” the Communications-as-a-Service (CaaS) space.
That means focusing on building out a platform where enterprises will come willingly to Zoom. One of the key benefits Zoom has over competitors such as Microsoft Corporation’s (NASDAQ: MSFT) Teams product is that it’s not a “walled garden”.
That means anyone can access Zoom calls without having to download software or install anything – one of the key reasons the product “went viral” and that Zoom is now a verb.
One of the key areas of growth for Zoom recently has been its Zoom Phone product, which is growing fast (see below) as a cloud-based alternative in the legacy telephony market – a US$25 billion total addressable market (TAM) on its own.
Source: Zoom Q2 FY 2022 earnings presentation
The company has gone from one million Zoom Phone seats to two million in around eight months, showing the extraordinary popularity of the product among clients.
For long-term investors, though, understanding where Zoom goes from here will require patience as Zoom shares are currently around 45% off their all-time high reached in October last year.
While CEO Eric Yuan continues to push Zoom to the next level, it is becoming much more than just a “video conferencing company”.
Investors may have to wait a few more quarters, or perhaps even a year, before the outsized comps fall out sight. However, when they do I’m confident that Zoom will have proved that it is here to stay.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Zoom Video Communications Inc and Microsoft Corporation.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be.
In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.