Why Zoom Stock Soared on Its First Day of Trading

Zoom's video-conferencing platform

Shares of video conferencing company Zoom Video Communications (NASDAQ: ZM) soared on Thursday after they began trading on the Nasdaq for the first time. After initially jumping 80% at the outset of the IPO, shares finished the trading day up 72% at $62. This put the stock significantly higher than the $36 price tag Zoom put on its IPO on Wednesday, the day before shares started trading.

The splashy debut, which gives Zoom an impressive $16.2 billion valuation, puts the video conferencing company in the spotlight. But how did Zoom get there?

Here's a look at the soaring revenue and profitability that have investors so excited.

A compelling growth story

Zoom isn't your average IPO. Revenue is not just growing, it's skyrocketing. For fiscal 2017, 2018, and 2019, revenue was $60.8 million, $151.5 million, and $330.5 million, respectively. That's 149% year-over-year growth in fiscal 2018 and 118% growth in fiscal 2019.

It doesn't stop there. The company's business model is showing clear signs of scalability. Zoom's gross profit surged 123% year over year in fiscal 2019, outpacing its top-line growth. Meanwhile, the company swung from a loss of $3.8 million in fiscal 2018 to a profit of $7.5 million in fiscal 2019.

For investors concerned about whether Zoom customers might jump ship for a competitor's product, consider the company's net dollar expansion rate -- i.e., its increase in user spend of existing customers over a comparable period. The company's trailing 12-month net dollar expansion rate for the period ending Jan. 31, 2019, was 140% -- and this is up from 139% and 138% rates for the trailing 12-month periods ending Oct. 31, 2018, and July 31, 2018, respectively.

"Many customers have increased the size of their subscriptions as they have expanded their use of our platform across their operations," Zoom said in its S-1 filing. "Some of our larger enterprise customers start with a single deployment of Zoom Meetings with one team, location or geography, before rolling out our platform throughout their organization."

Zoom believes its strong growth within existing customers will continue: "For the fiscal year ended Jan. 31, 2019, greater than 50% of the Fortune 500 had at least one paid Zoom host, compared to only 4% that contributed more than $100,000 of revenue. We believe this demonstrates that our product has already gained a foothold in many of the largest enterprises in the United States, and there is a large opportunity to expand within these large enterprise customers."

A lofty price to pay

Investors should mind Zoom's pricey valuation. With a $16.2 billion market capitalization, it now trades at nearly 49 times last year's sales. For the company to live up to the market's lofty expectations, Zoom will need to continue growing revenue and earnings per share at uncanny rates for years to come.

While investors may want to refrain from buying shares at this valuation, this fast-growing company is at least worth a spot on your watchlist.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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