Zoom Video Communications Inc

Zoom Video Communications Inc (NASDAQ: ZM) is a video communication platform provider. The company's technology connects people via video, phone, chat, and webinars, and allows for cross-device and cross-location interactions. Zoom Meetings, Zoom Phone, Zoom Chat, Zoom Rooms, Zoom Hardware-as-a-Service, Zoom Conference Room Connector, Zoom Events, Zoom Webinar, Zoom Developer Platform, Zoom App Marketplace, and Zoom Contact Center are just a few of the company's offerings. Education, entertainment/media, enterprise infrastructure, finance, government, healthcare, manufacturing, nonprofit/not-for-profit and social impact, retail/consumer products, and software/Internet are among its customer categories.

Latest News

• Acquisition of Solvvy: Zoom Video Communications, Inc. on May 12, 2022, announced it has entered into a definitive agreement to acquire Solvvy, a leading conversational AI and automation platform for customer support. Together, Zoom and Solvvy will offer elevated customer service experiences to a global enterprise base and work quickly to capitalize on new opportunities in contact center and customer support. The transaction is expected to close in Q2 FY2023. Terms of the transaction were not disclosed.
• Zoom Contact Center, Zoom Whiteboard, and Zoom IQ for Sales were all released in Q1, indicating the company's continuous commitment to improving the customer experience and fostering hybrid work. These unique solutions, according to Zoom Video Communications Inc, will boost the company's market opportunities for future development and expansion with consumers.
• Q1 FY23 Financial results announcement: Zoom Video Communication Inc. has announced its Q1 FY 23 financial results on May 23, 2022. Zoom missed profit projections by a hair but beat the top line and gave a better-than-expected outlook for the second quarter. During the pandemic, the firm saw five quarters of triple-digit revenue increase.

Q1 FY23 Financial result

• Total sales increased 12% year over year to USD 1.074 billion in Q1, coming into the high end of the forecasted guidance. The company's Enterprise segment, which showed a steady increase in clients and increased renewal rates year over year, was the main driver of growth. Zoom Rooms and Zoom Phone continued to be successful, with 3 million tickets sold throughout the quarter. Renewals in Online increased sequentially, although growth was hampered by foreign headwinds such as the strengthening of the currency and the conflict between Russia and Ukraine.
• Revenue from Enterprise clients increased by 31% year over year to 52 percent of overall revenue, up from 45 percent in the first quarter of FY '22. In the first quarter, the company's trailing 12-month net dollar expansion rate for Enterprise clients was 123 percent.
• In Q1, non-GAAP gross margin was 78.6%, up from 73.9 percent in Q1 last year and 78.3 percent the previous quarter. The sequential improvement was mostly due to improved public cloud utilization and an increase in the number of co-located data centers.
• Zoom's focus on innovation drove up research and development expenses by 105 percent year over year to almost USD 85 million. R&D spending climbed to 7.9% of total sales from 4.3 percent in the first quarter of previous year. Zoom's latest product launches highlight the company's continued commitment to growing its platform and meeting customers' changing demands.
• G&A costs increased by 26% to USD 93 million, accounting for 8.6% of total sales. As a result of improvements in cloud operations, non-GAAP operating income increased to USD 400 million, beating the high end of projections of USD 350 million. This led to a non-GAAP operating margin of 37.2 percent in Q1, down from 41.9 percent a year earlier and 39.2 percent the previous quarter.
• In Q1, non-GAAP diluted profits per share were USD 1.03, USD 0.15 more than the high end of forecast and USD 0.29 lower than the same quarter previous year.

Balance sheet and cash position

• Zoom had roughly USD 5.7 billion in cash, cash equivalents, and marketable securities at the end of the quarter, compared to USD 5.3 billion on January 31, 2022.
• Operating cash flow was USD 526 million in the first quarter, down from USD 533 million the previous year. Free cash flow increased to USD 501 million from USD 454 million in the first quarter of previous year. Zoom's operational and free cash flow margins are quite good, at 49 percent and 46.7 percent, respectively.

Key Risk Analysis

• Finance & Corporate risk: Zoom has invested strategically in both public and private firms. It claims that private company investments might appreciate because of events such as acquisitions or first public offerings. However, it warns that valuing private enterprises is typically difficult. As a result, the value of its public and private company investments may drop, negatively impacting its business and financial performance.
• FX risk: In terms of foreign exchange, the implications are in the euro, pound, and yen, and Zoom has factored into its forecast an estimate that the combination of both, the strengthening of the dollar, as well as the impact of the conflict, will have around a 1% impact on revenue.

Outlook

• Second Quarter Fiscal Year 2023: Non-GAAP income from operations is estimated to be between USD 360.0 million and USD 365.0 million, with total revenue expected to be between USD 1.115 billion and USD 1.120 billion. With about 308 million non-GAAP weighted average shares outstanding, non-GAAP diluted EPS is estimated to be between USD 0.90 and USD 0.92.
• Full Fiscal Year 2023: The total revenue forecast is between USD 4.530 billion and USD 4.550 billion. Non-GAAP income from operations for the full fiscal year is estimated to be between USD 1.480 billion and USD 1.500 billion. With about 309 million non-GAAP weighted average shares outstanding, full fiscal year non-GAAP diluted EPS is estimated to be between USD 3.70 and USD 3.77.

 Valuation Methodology: Price/Earnings Per Share Multiple - based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, ZM's share price has corrected by 57.08%. The stock is currently leaning towards the lower end of its 52-week range of USD 79.03 to USD 406.48. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 116.03. We believe that the company is trading at a discount from its peer's average but having strong fundamentals, competitive advantages in profitability margins, and a strong outlook gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, robust top-line results, associated risks, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 90.20 up 0.98%, as of May 24, 2022, at 08:40 AM PDT.

One Year Technical Chart, as of May 24, 2022, at 08:40 AM PDT. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Current Price as of May 24, 2022, at 08:40 AM PDT.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.