Zoom Video’s (ZM) first quarter fiscal 2020 earnings results and its strong fiscal year guidance was simply breathtaking, underscoring the exuberance investors have shown for so-called “unicorns.”
First coined in 2013 by venture capitalist Aileen Lee, “unicorn” refers to privately held startups that are valued at over $1 billion. The term refers to a mythical animal and an underlying uncertainty that said unicorn will live up to expectation as a profitable venture. To say it plainly, can unicorns live up to the hype?
And as unicorns see their stock prices rise, in the case of Zoom and Beyond Meat (BYND), this brings up the obligatory valuation argument and scrutiny from the press, analysts and, of course, short sellers.
Following Zoom’s impressive earnings results, the stock surged almost 20%, closing at $94.05. This was after the shares had already skyrocketed 116% from the company's IPO price of $36, while surging 25% from the $62 price at which the stock closed its first trading day. The stock closed on Friday at $100.29, marking an impressive 180% premium from the $36 IPO pricing. This gives the videoconferencing company a market cap of more than $27 billion, while critics are quick to point out that the company recorded only $331 million in revenue in fiscal 2019.
It would seem, for Zoom, the market is pricing in tons of future success. And the company’s fiscal 2020 guidance had a lot to with the elevated expectations. For the full year, Zoom management forecasts revenue to come in the range of $535 million and $540 million, well ahead of the $526 million analysts were looking for. Based on the midpoint of the guidance, the company’s enterprise value/revenue ratio exceeds 51 times. Also, with the midpoint of the expected full-year non-GAAP EPS of 25 cents, puts the P/E ratio around 3,760.
Indeed, one can look objectively and say there’s some irrational exuberance with Zoom’s stock, to paraphrase former Fed Chair Allan Greenspan, especially when factoring that the S&P 500 trades at a P/E of 18. But there are also tons of reasons to suggests that not only does Zoom deserve the valuation, it might be somewhat discounted. For instance, Q1 revenue growth soared 103% to $122 million, crushing analysts' average forecast for revenue of $112 million.
Revenue was driven not only by growth in new customers, but also strong sales expansion within existing customers. Next, while the company did post a net loss of $0.2 million, it marks a massive improvement from the $1.3 million loss it recorded a year ago. Meanwhile, the company’s adjusted earnings also jumped sharply to $8.9 million, rising from a net loss of $0.5 million in last year. Last but certainly not least, the company generated $22.2 million of cash from operations during the quarter, up strongly from last year’s $2.8 million.
These metrics, including the $15.3 million Zoom generated in free cash flow (FCF), reversing the negative FCF of $1.1 million in the year-ago quarter, underscores how lucrative Zoom's business model is and can become in the future. All told, while there’s an argument to be made regarding Zoom’s stock price, there’s nothing mythical about the company’s execution, suggesting Zoom may yet be a bargain.