By Wallace Witkowski
Zoom Video Communications Inc. shares traded against the grain amid Tuesday’s tech rout, as the videoconferencing company’s earnings and outlook suggested the company is beginning to move into a new stage beyond the pandemic spike.
Zoom (NAS:ZM) shares rallied as much as 9% Tuesday and finished up 5.6% at $94.37, as the tech-heavy Nasdaq Composite Index (NASDAQ:COMP) fell as much as 4% to finish down 2.4%, and the S&P 500 index (S&P:SPX) slid as much as 2.5% to close down 0.8%.
Shares soared as much as 20% late Monday , after Zoom’s quarterly earnings topped expectations and the company said it expects to be more profitable this year than initially expected, even as headwinds like the conflict in Ukraine and a stronger dollar keep its revenue forecast unchanged.
Benchmark analyst Matthew Harrigan, who has a buy rating and raised his price target to $128, commented that Zoom’s 20% jump after hours Monday was a response to first-quarter momentum and product innovation and the hiked outlook, with the pullback attributed to Nasdaq futures falling.
“Despite a softening economy, enterprises appear committed to ‘good’ technology spending especially for the cloud,” Harrigan said. “Zoom’s enterprise sales [for the first quarter] component increased to 52% from 45% for the year ago quarter, implying 31% top line growth. The tally of enterprise customers rose 24% to ~198.9K.”
“We feel the fixation on Zoom as a COVID pandemic lockdown aberration is exaggerated as global tech and financial firms recognize the permanence of hybrid work,” Harrigan said. “We expect sales growth to accelerate to the mid to high teens post F2024 as adjacent products such as Zoom Phone and the On Zoom immersive experience marketplace gain traction and Enterprise penetration expands.”
Morgan Stanley analyst Meta Marshall, who has an overweight rating and a $140 price target, said Zoom “rebutted overwhelmingly negative sentiment” with the report as the company locked in a large percentage of renewals from customers that had fled to the service because of COVID-restrictions.
“With a more challenged macro environment seemingly increasingly likely, there will be more scrutiny by organizations on opex spend,’ Marshall said. “While investors like to think this poses a risk to video spend, we think it poses a greater threat to more operational expenses like head count / travel / entertainment.”
“While we do think there is a value to in person interaction and that there will continue to be meaningful travel, we also think that in more challenged budget environments, more scrutiny will be applied to whether the incremental meeting can be done over Zoom (particularly if internal),” Marshall said. “With a Zoom license for a year being a fraction of the cost of one flight (in the vast majority of cases), we think the desire to cut a flight vs. the Zoom license will be a decision that leans towards keeping Zoom spend in place.”
Citi Research analyst Tyler Radke, who has a neutral rating and lowered his price target to $99 from $118, called Zoom’s result “mixed” but “likely better than many investors feared.”
Even with Zoom raising its earnings forecast and gross margin outlook for the year, Radke said he still believes the “numbers are unlikely to address concerns around intensifying competition and lower profitability.”
“Despite a better Q2 outlook, FY’23 revenue guidance was unchanged and the [free cash flow] margin fell below Street,” Radke said. “We maintain our Neutral rating as we continue to see growth slowing at Zoom as a result of normalized demand patterns and rising competition, while margins are likely to remain under pressure as the company reinvests across new and existing products.”
Mizuho analyst Siti Panigrahi, who has a buy rating and a $180 price target, said the company’s softening online growth was due to volatility in Europe, Middle East and Africa, and that “enterprise continued to show strong momentum.”
“We continue to view FY23 as a transition year as Zoom invests to build a durable, postpandemic growth profile through multiple growth levers (Zoom Phone, Zoom Rooms, Contact Center) to deliver high-teens growth,” Panigrahi said. “Although Zoom shares may remain rangebound in the near term, we believe the current valuation of [about five times enterprise value divided by next 12 months revenue] multiple offers a better risk/reward.”
Of the 31 analysts who cover Zoom, 14 have buy-grade ratings, 16 have hold ratings, and one has a sell rating. Of those, 12 lowered their price targets and one raised theirs resulting in an average price target of $139 from a previous $163.12, according to FactSet data.
Over the past 12 months, Zoom’s stock has dropped 71%, compared with a 6.1% decline by the S&P 500, and a 17.5% fall by the Nasdaq.