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Slashing Zoom Stock Fair Value to $160

We have reduced confidence in Zoom's long-term outlook.

While Zoom ZM reported fourth-quarter results that exceeded the high end of guidance for both revenue and non-GAAP operating profit, we are significantly reducing our value estimate to $160 per share, from $260 per share, based on guidance that was meaningfully short of our model and FactSet consensus for fiscal 2023. In turn, we have reduced confidence in Zoom's longer-term outlook as online customers churn off and enterprise growth cannot make up the difference. Accordingly, we are lowering our growth and margin expectations by several hundred basis points in each year of our discrete 10-year forecast as we struggle to define Zoom's normalized financial model post-COVID-19.

Quarterly strength was driven by a continued pivot to enterprise customers and robust Zoom Phone seat additions. We are also encouraged by the launch just last week of the Zoom Contact Center, which we think will help drive revenue acceleration over the next couple of years. We think the $1 billion share buyback authorization should help offset dilution and buttress investor confidence. We now believe 2023 is an investment year in terms of sales capacity and product development, which further contributes to our low conviction in this narrow-moat name, even if shares may look attractive even versus our revised fair value estimate.

Revenue grew 21% year over year to $1.071 billion, which topped the high end of guidance of $1.053 billion. Customers with more than $100,000 in trailing annual revenues remain robust and were up 66% year over year to 2,725, with several large deals of more than 10,000 seats signed during the quarter. Upsells of Zoom Phone and a pickup in Zoom Rooms helped drive larger deals. Zoom Phone was strong and added 550,000 new seats. Net dollar expansion for enterprise customers remains strong at 130% or better in each quarter for the last two years. Enterprise customers drove 50% of revenue, which we expect to continue to increase over the next couple of years.

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