Summary
The stock is now down about 70% from all-time highs.
Growth has moderated but valuation has come down and is much more reasonable.
The growth is continuing and we like what we see in customer counts.
Using our trade prescription, the existing growth, in our opinion, justifies a buy.
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Morsa Images/DigitalVision via Getty Images We have traded Zoom Video Communications ( ZM ) stock several times, with the stock most recently blowing through a downside target that we last set in August . The thing is, when trading, you have to play on your belly. You set your stops, your targets, and stick to them. Then there is investing, and frankly, this is what your trading should help with. Your gains should feed your long-term investments. We digress.
We see Zoom as a wonderful trading stock, both long and short just due to the swings. But as the stock has pulled back terribly, we think that both long-term investors and traders, who may have been stopped prior, can take another stab here. The growth remains intact, and valuation, while still a bit high, is much improved. As shares fall again on earnings , we see shares as a buy here, with the following approach: The play
Target entry 1: $220 (25% of position)
Target entry 2: $207 (35% of position)
Target entry 3: $192 (45% of position)
Stop loss: $175
Target exit: $265-$270 Discussion
Everyone knows what the company does. Telecommuting was made possible by Zoom and a few other companies. Yes, there is competition. Yes, it is still expensive. Analysts will do what they do and be reactionary, but you need to think about sentiment, and there may be some downgrades but, in terms of price target, we are being conservative. With what we are seeing in public schools and more companies pushing back full returns to the office, Zoom is still winning, though guidance may be spooking the Street: The most important reason the stock is falling we think, is that guidance, while about what is expected, is, well, about what was expected. At this valuation, despite the stock being down tremendously, it is still priced for some really good beat and raises. Revenue growth has come down tremendously as the pandemic has normalized, though, the company still managed a 35% growth in revenue. Folks, the world is open again. This is solid growth. The guidance is “fine” considering shares are down 150 points in a few months.
But there is still solid growth. Zoom Communications is continuing major adds and upsells and have secured big deals from major corporations which will translate to recurring revenue. Source: Zoom Q3 slides
The company has a good mix of little and large customers. But the large customer growth is clear. Now, the fear is that the company is going through a post-COVID “transition period,” a fact that tempered its guidance for H2 2022 (fiscal year), and has led to ongoing declines in its stock price. The contrarian in us says let it fall, then do some buying.
So, total revenue for the third quarter was $1.051 billion, up 35% year over year, as mentioned, but it was also up from the sequential quarter ‘s $1.021 billion: Source: Zoom Q3 slides
GAAP income from operations was a strong $290.9 million, up from $192.2 million in the third quarter of fiscal year 2021. However, it was down from $294 million in the sequential quarter. After making some adjustments for stock compensation and acquisition expenses, adjusted income from operations was $411.3 million, up from $290.8 million in the third quarter of fiscal year 2021. However, it did fall 3% from the sequential quarter.
Now the GAAP operating margin was also down from the sequential quarter and that is likely triggering some selling. It came in at 27.7% vs. 28.8% in Q2. The adjusted operating margin was 39.1%, which also fell sequentially. This is still very positive overall in terms of margins, though the declines are negative. But the market has priced some of this in with the stock falling so much. What is more is that cash flow remains strong. Source: Zoom Q3 slidesSo as you can see, this is not just a revenue growth company. They are generating real and meaningful cash flows. Everyone knows the big COVID bump was temporary. This is not a surprise. The fact is growth is normalizing and the market took the stock down nearly 70% […]
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