Zoom Video Communications Stock: Miscommunication (NASDAQ:ZM)
Zoom Communications Shares (NASDAQ:ZM) saw lows retested around the $80 mark as the latest round of quarterly results, including a weak margin outlook, set investors up for further disappointment.
In March of this year i believed it was time to call as Zoom’s stock plunge caused the stock to fall into the double digits as I thought valuations had been cut quite a bit causing that allure to slowly start to emerge.
A bit of context
Zoom went public in 2019 and the shares traded around the $60 mark soon after the offering, actually hitting the $100 mark, as it was a time when the company was of course much smaller. . The company was the poster child of the pandemic as shares hit the $500 mark in October of the year with the sell-off of $3.5 billion for the year around 4 times the original revenue forecast!
The company guided for 2021 sales to grow modestly to $4.0 billion and unlike so many tech names (at the time), the company was extremely profitable with GAAP profit margins exceeding 20%, still translating to a 100 times earnings multiple, with the company backing a hundred billion valuation at the time on the back of a 25 times sales multiple.
Optimism prompted Zoom to pursue a $14.7 billion deal for Five9 last summer as everything went downhill from there, even though that deal fell through, and the company continued to hold a stake. very large net cash position. Shares continued to fall amid a normalization in valuations, the pandemic pullback and fears of competitive pressure, with names like Microsoft (MSFT) also offering similar cheaper services.
In March, shares fell to the $100 mark, down 80% from the highs, as the move is even an underreaction given the net cash position held by the company. In early 2022, the company reported fourth quarter results with revenue up 21% to $1.07 billion, with GAAP operating profit of $252 million being strong. Non-GAAP earnings came in at $1.29 per share, but adjusting for stock-based compensation expense, I pegged a realistic earnings closer to $3 per share.
For the upcoming fiscal year 2023, the company has forecast revenue at a midpoint of $4.54 billion, suggesting modest growth from the $4.10 billion in revenue reported in fiscal year 2022. Earnings adjusted is expected to drop from $3.34 per share to $3.48 per share. , but after ditching stock-based compensation, I see realistic earnings closer to just $2.50 per share.
The 306 million shares valued the company’s equity at $30 billion in March, or $25 billion if I take net cash into account. This still works out to 5-6 times the sales, but a realistic earnings multiple of thirty times less. These multiples are tough enough to be optimistic about in name and while the revenue numbers look reasonable, the margins were deteriorating.
Although largely a pandemic game, its services would still be used in a post-pandemic world, as there were many balancing acts, including a more modest valuation, but other apart from fierce competition and potential for mergers and acquisitions as well.
Since my take in March, the shares have traded widely in a price range of $80 to $120, now trading towards the lower end of the range after the latest quarterly results. In May, Zoom posted a 12% increase first-quarter sales of $1.08 billion. That was pretty much the good news as GAAP operating margins took a beating, with GAAP operating profit down $226 million to $187 million.
Following investment losses, the company saw its GAAP earnings halved to $0.37 per share as non-GAAP earnings fell 30 cents to $1.03 per share, excluding compensation expense. share base that doubled. While a forecast of over $3.70 per share in adjusted earnings seems optimistic, stock-based compensation is on the rise, so it’s not that meaningful to me.
In August, Zoom recorded sales growth decelerate to 8%, although a strong dollar is hurting activity, while the pressure on margins is only increasing. Second-quarter operating profits fell from $295 million last year to just $122 million, with quarterly stock-based compensation charges rising to just over a quarter of a billion, allowing the adjusted earnings to reach $1.05 per share.
The 307 million shares are now down to $80 per share, for a market valuation of just over $24 billion, as operating assets are valued at around $19 billion here. This reduces the sales multiple to 4-5 times, even though the full year sales forecast has been reduced by $150 million to $4.39 billion.
Non-GAAP earnings are estimated to be between $3.66 and $3.69 per share and given that adjusted earnings were already $2.08 per share in the first half of the year, strong pressure on margins is seen over the next two quarters, with earnings of around $1.60 in the second half of the fiscal year. This reveals that GAAP earnings are likely considered stable in the near term.
Attention – Considering the margins
After believing the value was close to being found at the $100 mark in March, I have to take a much more cautious stance here 20% lower. This comes amid the margin pressure getting worse here. Not only is the gap between GAAP and non-GAAP earnings growing due to rapidly increasing stock-based compensation spending (equal to about a billion, or 25% of sales here). The other issue is that the full-year forecast doesn’t imply any realistic profit to be seen for the second half of the year, and that’s after removing that incentive spending.
All of this makes me extremely cautious as the profitability thesis is gone, making it difficult for the stock to find fundamental support with seemingly rapidly increasing competitive pressures.