The stock price of video conferencing major Zoom Video Communications (NASDAQ:ZM) has rallied by over 500% year-to-date as the company emerged as one of the biggest beneficiaries of the remote-work and distance-learning trend through the Covid-19 pandemic. Zoom now has a market cap of about $120 billion – making it more valuable than Dow constituents such as International Business Machines ($110 Bil), The Boeing Company ($97 Bil), 3M Company ($95 Bil) as well as nearly equal S&P 500 constituents Lowe’s ($127 Bil), Charter Communications ($126 Bil), Philip Morris International Inc ($123 Bil). What’s driving the surge and is Zoom’s valuation sustainable?
Our dashboard Zoom Video Communications, worth over $120 Bil, is more valuable than IBM compares Zoom with IBM, 3M, and Boeing.
Demand for Zoom’s video conferencing services has been surging through the Covid-19 pandemic. Zoom stock rallied by over 40% this week after the company posted blowout Q2 FY’21 results and raised full-year revenue guidance. Revenues rose 4.5 x year-over-year to $664 million, with Net Income soaring 34x to $186 million. Zoom now has about 370k customers with more than 10 employees, up approximately 458% from the same quarter last fiscal year.
Zoom is now valued at about 170x the upper end of its FY’21 EPS guidance and 50x its Revenue guidance. Can the company grow fast enough to sustain this valuation? We think it’s unlikely. Based on Zoom’s Q3 FY’21 guidance, growth could remain almost flat quarter-over-quarter, and based on consensus estimates, Revenue growth for the next year is likely to be under 30%, as the pandemic likely slows and the physical economy opens up further. Sure, Zoom has fairly consistently beaten estimates, but the competition is also tough. Zoom had a head start through the pandemic, driven by its ease of use. However, platform titans such as Microsoft (NASDAQ:MSFT) – which is deeply entrenched in the enterprise space and Google’s parent Alphabet (NASDAQ:GOOG), and Facebook (NASDAQ:FB) could continue to refine their video conferencing services, and offer better integration with their other products reducing Zoom’s growth potential.
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