Microsoft (MSFT) and its Teams communications tools are Zoom’s major rival in the business market. Microsoft is upgrading its products with technology from startup OpenAI. Meetings on the platform can host as many as 1,000 participants, while webinars can scale up to as many as 50,000. This is despite the fact that Zoom is, in fact, one of the companies that could significantly benefit from the AI boom and has actually shown quite some promising developments over recent months.
The emergence of formidable competitors, particularly Microsoft Teams (MSFT), equipped with advanced AI capabilities and seamless integration, has eroded Zoom’s once-dominant position. While a commendable effort, the company’s attempts to enter the productivity market with Zoom Docs may face challenges against established players like Microsoft Office and Google Docs (GOOG) (GOOGL). For the full year, Zoom is guiding for sales of $4.6 billion — a target that fell slightly short of the average analyst call for revenue of $4.66 billion. On the other hand, guidance for a profit between $4.85 per share and $4.88 per share topped the average analyst estimate for a per-share profit of $4.72 for the year.
For that period, the company reported net income of $672.3 million on revenue of $2.7 billion. Zoom is a member of the information technology sector and operates within the software industry. They include legacy web-based meeting service providers such as Cisco Systems Inc.’s (CSCO) WebEx and LogMeIn Inc.’s GoToMeeting. Rivals also include bundled productivity solution providers with video functionality such as Alphabet Inc.’s (GOOGL) Google G Suite and Microsoft Inc.’s (MSFT) Microsoft Teams. Other competitors are unified communications as a service (UCaaS) and legacy private bank exchange (PBX) providers such as 8×8 Inc. (EGHT), Avaya Holdings Corp. (AVYA), and RingCentral Inc. (RNG).
This leaves pretty much no upside potential over the next 12+ months, which is why I reconfirm my sell rating on Zoom, despite some positive developments and outlook upgrades. The resilient gross margin, combined with cost efficiencies and some one-off benefits, allowed Zoom to improve the operating margin to 39.3%, up 470 basis points YoY. This resulted in a non-GAAP operating income of $447 million, up 17% YoY. Nevertheless, Zoom reported a 5% growth in Enterprise customers in Q3. Enterprise now accounted for 58% of revenue, up from 56% in the same quarter last year. Still, Zoom continues to face a slowdown in the underlying industry, mainly driven by a slowdown in growth in the enterprise segment, which was up just 8% in Q3, down from 24% growth in fiscal FY23.
- It serves individuals; and education, entertainment/media, enterprise infrastructure, finance, government, healthcare, manufacturing, non-profit/not for profit and social impact, retail/consumer products, and software/Internet industries.
- This resulted in a non-GAAP operating income of $447 million, up 17% YoY.
- Anthropic’s AI model will be integrated into Zoom’s Contact Center platform.
- In the business market, Zoom rivals include RingCentral (RNG), Cisco Systems (CSCO), Google and others.
- Looking at the projections of multiple market research agencies, a CAGR of around the 11% mark seems highly likely.
- Clearly, the company is operating in a challenging environment and struggling to grow revenue and earnings.
For Q4, management has guided revenue to be in the range of $1.125 billion to $1.13 billion, up just 1% at the midpoint of the range, indicating that growth continues to slow down. However, management has been very conservative in its guidance over recent quarters, so these estimates probably have some upside. Management further guides for an operating margin of around 36.5%, up 30 basis points YoY. While I am in favor of this strategy on many occasions, I am not sure in this situation as it leaves investors highly exposed to the significant levels of SBC. Furthermore, as a result, GAAP EPS remained much lower at just $0.45, indicating that SBC continues to take up 66% of non-GAAP net income, which is significant. YTD, this increases further to 70% of non-GAAP net income, with SBC of $813 million.
Zoom Video Communications Inc News
With 2026 just two years away, Ark Invest’s base case estimates are looking increasingly unlikely to come to pass, and it may even fall short of the $700-per-share bear case estimate. Also, 3% revenue growth will probably not inspire growth-oriented investors. Its forward price-to-earnings (P/E) ratio is just under 14, and the price-to-sales (P/S) ratio of less than 5 is just above all-time lows. That valuation positions the stock for a massive surge if the company can stoke a recovery in revenue growth. While the overall videoconferencing market is projected to experience low-double-digit growth, Zoom’s market share, sitting at an impressive 55%, appears increasingly vulnerable.
Zoom recorded non-GAAP (adjusted) earnings per share of $1.42 on sales of $1.15 billion in Q4. Meanwhile, the average analyst estimate had called for the business to post an adjusted per-share Volatility index trading profit of $1.15 on revenue of $1.13 billion. Given the state of the company, investors should consider Zoom stock. Admittedly, investors like Ark Invest may have to adjust their expectations.
About Zoom Video Communications, Inc.
The company emerged as a winner from the COVID-19 pandemic, fully benefiting from the working-from-home trend and rapidly growing demand for videoconferencing tools. However, these tailwinds driving growth for Zoom from 2020 to mid-2021 have eased away, putting pressure on the company as growth is hard to come by, competition is intensifying, and its financials did not align with its new growth profile. Whereas the company fundamentally definitely had potential, I saw too many negatives and headwinds for it to get past to consider this a solid investment. Despite an upgrade in financial estimates, the stock’s current valuation, trading at 14.5x this year’s earnings, does not present a compelling investment case. With an outlook of mid-single digits CAGR for revenue and low-single digits for EPS, coupled with the prevailing risks, the risk/reward profile appears unfavorable.
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Looking ahead, Zoom’s guidance for Q4 reflects a slowdown in growth, indicating ongoing challenges. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$29b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$69.2, the company appears quite good value at a 30% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out. This should result in fiscal FY24 revenue of $4.506 billion to $4.511 billion, up slightly from management’s prior expectations and up 3% at the midpoint.
The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period.
Hopefully, revenue increases will accelerate again, but investors might have to be patient and wait at least another four quarters, barring Zoom outperforming its guidance. Its 101% net revenue retention rate signals that existing customer https://www.day-trading.info/review-of-alpari-forex-broker/ spending is stagnant. The company is trying to cross-sell new products that are based on artificial intelligence (AI), and it pointed to some traction in the fourth quarter, calling out some notable logo wins in Broadcom and Diageo.
This reflects the depressed IT spending we currently see among enterprises and does not surprise me. This was further highlighted by a weakening net retention rate, which came in at 105% in Q3, down from a 115% https://www.topforexnews.org/software-development/mvc-developer-job-openings-search-mvc-developer-2/ level in fiscal FY23, reflecting a lower demand environment. Growth so far in 2023 had turned out much better than what management had guided for at the start of the year when it had guided growth of just 1%.
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I have increased both my revenue and EPS estimates through the company’s fiscal FY27. I expect the company to have reached a peak in its margins and these to ease slightly in the upcoming years. These expectations result in the following financial projections. Overall, I must, nevertheless, admit that I am quite impressed by Zoom’s fiscal FY24 so far, as the company has shown the ability to roll out features much faster than peers, maintain existing customers, and continue to attract new customers. Yes, Microsoft’s Teams platforms seem to be growing slightly faster, but Zoom’s market share losses seem to be less significant than I anticipated eight months ago.
Fortunately, low expectations don’t require home-run results to create significant investment returns. Zoom is unfairly cheap for a company so profitable and flush with cash. The stock could be a winner again if Wall Street comes to its senses and realizes that. That’s why analysts estimate Zoom’s earnings growth could average over 30% annually over the next three to five years. Still, Zoom feels like a car stuck in the mud, spinning its tires but not moving much.