© Reuters. Video zoom: very profitable, but the competition is tough
Focus on video communications (NASDAQ 🙂 is a very interesting company.
His name has become synonymous with video conferencing over the past two years, as he has been one of the ultimate beneficiaries of the COVID-19 pandemic.
Zoom‘s revenues quadrupled in 2020 as the work-from-home economy became the new normal. Due to the company’s fantastic scalability outlook, Zoom also enjoys breathtaking margins, which continue to grow as its number of customers grows.
In its latest quarterly results, Zoom reported year-over-year revenue growth of 54% to $ 1.02 billion. Net income increased 70.5% to $ 317 million, with net profit margins hitting around 31%.
Even if Zoom’s revenue growth slows, it is highly likely that an expansion in margins alone will maintain satisfactory levels of growth due to the lean business model of the company.
I am bullish on the stock. (See ZM stock charts on TipRanks)
Boost growth with Five9 (NASDAQ 🙂
Earlier in July, the company capitalized on its continued momentum by announcing a $ 14.7 billion equity deal to acquire Five9 (FIVN).
Therefore, in addition to its own growth in the video conferencing space, Zoom should be able to unlock synergies and operational efficiencies with the Five9 platform.
Five9 reports revenues of $ 521.7 million in the past 12 months. At its current price, the company is trading at around 18.5 times its futures sales.
Considering Five9’s revenue grew 44% last quarter, Zoom doesn’t seem to be paying too much in this deal. This is especially the case if you assume that the merger will speed up the finances of both companies.
It’s worth noting that Zoom also performs very well on the Rule of 40, which provides a useful benchmark for SaaS businesses. Its net margins of 31% and revenue growth of 54% give it a score of 85 (a score above 40 is considered excellent).
Despite Zoom’s attractive features, risks remain.
First, the company faces strong competition.
While various companies such as Cisco Systems (NASDAQ 🙂 offer their respective videoconferencing solutions, it is Microsoft’s (NASDAQ 🙂 teams that can redirect some Zoom customers. Indeed, Microsoft can combine Teams with its Office suite.
Given Zoom’s forward P / E of 58.2, if the competition slows its growth significantly in a post-COVID-19 world, stocks should take a hit.
In addition, management has guided third-quarter 2022 revenue to between $ 1.015 billion and $ 1.020 billion, suggesting growth of about 31% year-over-year.
This rate is clearly showing signs of slowing down, which, while natural and expected, could be of concern if Zoom’s net margin expansion slows in the near term as well.
The Taking of Wall Street
When it comes to Wall Street, Zoom has a moderate buy consensus rating, based on 10 buys and eight holdbacks awarded in the past three months. At $ 375.85, the ZM average price target implies upside potential of 31.9%.
Disclosure: At the time of publication, Nikolaos Sismanis does not have a position in any of the titles mentioned in this article.
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