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Stock Analyst Update

Strong Quarter for Zoom, But Decelerating Guidance

We remain impressed by the no-moat company and raise our fair value estimate to $252.


No-moat Zoom (ZM) continues to blow past investor expectations with significant second-quarter upside relative to guidance. However, third-quarter guidance was mixed but largely in line and implied fourth-quarter guidance shows a steeper deceleration in topline growth than anticipated as a result of increasing churn and lower customers additions in the online channel that focuses on smaller customers. On this point we note Zoom has been guiding to deceleration as the year progresses, even as it has been beating expectations and raising full year expectations over the last three quarters. We see a long runway for growth as the company gains traction with Zoom Phone and evolves its main application to a communication platform. Along these lines, management will focus on expanding its platform to feature a wider array of revenue generating products as hyper growth normalizes.

We remain impressed by management’s ability to over deliver in terms of both growth and margins. Given strong results, we are raising our estimates slightly, driving our fair value estimate to $252 per share from $245 but we still view shares as overvalued.

Revenue grew 54% year over year to $1.021 billion, which topped the high end of guidance of $990 million. Direct and channel business was strong, with enterprise customers doing larger deals but taking more time to evaluate the solution and being more strategic in their approach. Customers with more than $100,000 in trailing annual revenues continue to accelerate and were up 131% year over year to 2,278. Upsells of Zoom Phone and a pickup in Zoom Rooms helped drive larger deals. New customers accounted for 74% of revenue, which is unusually high for a software company of Zoom’s size. Zoom Phone momentum continued during the quarter, with the company reaching 2 million seats. Net dollar expansion remains strong at 130%, although management noted it is below 100% for smaller customers, implying really strong results with larger customer.

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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