Zoom Video (ZM) Q3 Earnings: What to Expect

Close-up of the Zoom Video logo
Credit: Andrei / stock.adobe.com

Shares of Zoom Video (ZM) have been punished considerably over the past six months. Shares have fallen as much as 58% to a recent low of $245 since the stock reached its all-time high of $588.84 in October 2020. During that same span the S&P 500 has risen some 32%. Is now a good time to bet on the stock’s rebound?

The video collaboration platform provider is set to report third quarter fiscal 2021 earnings results after the closing bell Monday. It seems the market has made up its mind about the company’s post-pandemic profitability goals. As vaccine distribution accelerates the market has grown concerned about Zoom’s ability to maintain its impressive growth rate and schools, universities and corporations reopen for in-person work and learn.

Investor concerns on small-and-medium-sized business turnover has also weighed heavily on the stock. Zoom will need to demonstrate that it can effectively grow its large enterprise customer business as it expands its ecosystem. Zoom's valuation has also been under the spotlight as competing products from Microsoft’s (MSFT) Teams and Cisco’s (CSCO) WebEx have implemented features that has made Zoom the go-to video collaboration platform at the height of the pandemic. But the management is aware of these concerns and taking the steps to improve its fundamentals.

On the heels of the collapse of the Five9 deal, the company is focusing on a new service named Zoom Video Engagement Center that is expected for launch in 2022. This is in addition to recently launching its Events platform for virtual and hybrid events which enables event organizers to charge admission fees by creating ticketed live events. Nevertheless, to reverse the negative downward trend in the stock price, Zoom will have to issue strong revenue growth forecast for Zoom Phone and Zoom Rooms which are critical to growing and maintaining its ecosystem.

For the three months that ended October, Wall Street expects the San Jose, Calif.-based company to earn $1.09 per share on revenue of $1.02 billion. This compares to the year-ago quarter when earnings came to 99 cents per share on revenue of $777.20 million. For the full year, ending January, earnings are projected to rise 45% year over year to $4.84 per share, while full-year revenue of $4.02 billion will rise 51% year over year.

Without questions, Zoom has been a victim of its own success. The slowing revenue growth rate, amid the company’s tough year-over-year comparisons, has been blamed for the pullback. The management, meanwhile, has done a solid job with profitability, raising the gross margin in each of the last few quarters from about 70% to 73%. The company is also taking the necessary steps to ensure its future growth is sustainable, including by entering the contact center space, while looking at various ways to better diversify its revenue stream.

How quickly this pivot into new revenue streams can occur will determine when the stock reaches a bottom. Beating on the top and bottom lines have not been enough. In the second quarter the company reported earnings of $1.36 per share on revenue of $1.02 billion -- the first time its quarterly revenue topped $1 billion. The number of customers contributing more than $100,000 surged 131% to 2,278, while customers with more than 10 employees rose 36% to 504,900.

But the stock plunged 16% after the company issued soft Q3 guidance which raised skepticism about its ability to maintain its growth amid a return-to-work environment. Zoom guidance on Monday will be the determining factor whether the stock can regain that evasive $300 level.

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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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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