Earnings season isn’t over just yet. Most S&P 500-listed companies have already released their quarterly numbers, and while Q2 corporate profits weren’t by any stretch of the imagination stellar, they were better than Wall Street analysts originally expected.
Video conferencing company Zoom (ZM) is among those still gearing up to reveal how it performed during the quarter, with its fiscal Q2 2021 earnings release slated for this afternoon. Ahead of the release, 5-star analyst Ryan Koontz, of Rosenblatt Securities, believes investors are going to see “very strong revenue results, likely ahead of consensus and conservative company guidance with earnings inline due to higher opex and ‘freemium’ product costs.” He also expects fiscal 2H21 revenue guidance to surpass the consensus and previous guidance in a similar way.
Koontz tells clients that the ongoing COVID-19 pandemic has played an integral role in the company’s success, arguing that its “laser focused business tool that spreads virally with minimal marketing” has been transformed into an “everyday business and consumer brand.” Like several of its peers, ZM’s product has become an essential tool in the work from home (WFH) environment.
Expounding on this, Koontz stated, “We believe businesses around the world are rapidly adopting video collaboration as a core business continuity tool which we expect should drive strong upside to conservative FY21 consensus numbers.”
On top of this, Koontz sees the company’s leadership team as a key strength. “We applaud ZM leadership for effectively addressing a broad set of security concerns that arose in March and only slightly impacted the company's brand,” he explained.
However, that’s not to say the analyst doesn’t have concerns. Along with its lofty valuation, increasing competitive threats and enterprise channel development reflect significant headwinds in FY22 and beyond.
“We expect the company to remain highly focused on video collaboration rather than its relatively undifferentiated Zoom Phone UCaaS product,” Koontz opined.
Even though he gave his revenue and EPS estimates for FY21 and FY22 a lift, Koontz doesn’t think that now is the time to pull the trigger. “Given the stock's incredible run (+315% vs S&P year-to-date), we believe buy-side expectations are sky-high and keen focus will be on enterprise revenue (just 23% of total last quarter). While we see tremendous opportunity in a high-growth market, we see high valuation risks,” he commented.
As a result, Koontz stays on the sidelines. He continues to assign ZM a Neutral rating, but increases the price target from $210 to $260. This target suggests shares could decline by 16.5% from current levels. (To watch Koontz’s track record, click here)
Turning now to the rest of the Street, opinions vary. 12 Buys, 8 Holds and 2 Sells add up to a Moderate Buy analyst consensus rating. Additionally, the $238.17 average price target implies downside potential of 24%. (See Zoom stock analysis on TipRanks)
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