Zoom Crushed Earnings. Here’s the Stock’s Next Challenge

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Zoom  (ZM) - Get Report shares have continued their torrid run in 2020, after the online video conferencing company put Wall Street earnings estimates to shame Tuesday. The stock’s valuation isn’t crazy to most analysts, but it will have to normalize in the long-run. 

The stock rose 5.5% Wednesday to $218 a share. 

The better-than-expected earnings results came on the back of the work-from-home environment resulting from COVID-19, creating a surge in new customers. The company is in explosive growth mode and is expected to remain so for several years, making it hard for analysts to accurately forecast quarterly figures, partly setting the stage for the company to surpass expectations handily. 

Here were the earnings results versus analysts expectations:

  • Revenue: $328.2 million vs. $202.7 million
  • Earnings Per Share: 20 cents vs. 9 cents 

Zoom’s gross margin shrunk by 12 percentage points year-over-year as accelerated spend on Amazon’s Amazon Web Services helped facilitate the company’s ability to meet the demand.

Zoom also drastically raised full year guidance for adjusted EPS to $1.25 from $ a prior forecast of 44 cents and for revenue of $1.79 billion, up fro $910 million. 

The stock, up 220% year-to-date, now trades at roughly 34 times its expected sales for the next year. That’s not inappropriate for an ultra high-growth tech company which the market is also still getting a feel for. The company went public just over a year ago. But for most growth tech companies that settle into a more tame multiple after a trading debut may sit at around 5 to 10 times forward sales. 

Analyst’s implied valuation, observing the average price target according to FactSet data, is around 28 times sales, as Zoom will grow revenue and adoption of its service explosively for the next several years. Zoom is expected to grow revenue at a roughly 30% annual clip for the next chunk of years, according to FactSet, extremely high, but also a come-down from the recent quarter’s 169% growth rate. Importantly, longer-term growth rates for the company may be seen to rise above current expectations if analysts see evidence that the recent quarter indicates a strong enough shift into the services, more so than prior expectations. 

The company is a classic example of the accelerated growth tech trends spurred by the virus and the work-from-home environment. 

The stock may maintain its gains for the next few years, but as its valuation flips over and expected growth rates moderate, so would the multiple. 

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