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Where next for Zoom shares after Q1 results?

Zoom shares rallied to $109 at the end of trading last week, bolstered by positive Q1 results and investor hopes of an overcorrection.

zoom Source: Bloomberg

Zoom (NASDAQ: ZM) shares rose to $66 apiece during their Initial Public Offering in April 2019. By October 2020, the Nasdaq 100 company’s shares had skyrocketed to a record $559 as the covid-19 pandemic saw demand for its technology soar.

Zoom’s share price then fell by 85% to $84 last month on a toxic cocktail of competition concerns from the likes of Microsoft's Teams and Alphabet's Google Meet, tightening monetary policy, and reduced demand due to the waning pandemic.

But it’s now recovered to $109 after a strong Q1 results update.

Zoom share price: Q1 FY23 results

Results were strong for the embattled Nasdaq stock. Even with the pandemic dying down, Q1 revenue was up 12% year-over-year to $1.073.8 billion, on a GAAP operating margin of 17.4%. Meanwhile, net cash as a result of operating activities hit $526.2 million, a 49% margin.

Founder and CEO Eric S. Yuan enthused that the company ‘launched Zoom Contact Center, Zoom Whiteboard and Zoom IQ for Sales, demonstrating our continued focus on enhancing the customer experience and promoting hybrid work.’

Expecting these developments to generate further growth, the CEO said revenue growth was driven by ‘by ongoing success in Enterprise, Zoom Rooms, and Zoom Phone, which reached 3 million seats during the quarter’ and highlighted its continued ‘strong profitability and cash flow.’

However, net income was cut in half to $113.7 million year-over-year, predominantly due to an increase in marketing costs, which more than trebled to $362.8 million. However, this was an expected cost increase, with organic demand slowing as more companies move back to the office.

zoom 2 Source: Bloomberg

Where next for Zoom shares?

Zoom expects to increase revenue to $1.1 billion in Q2 and to make between $4.5 billion and $4.6 billion in FY23. This marks a huge slowdown in growth compared to the pandemic years.

For context, while Q1 revenue growth beat the Refinitiv average analyst estimate, it represented the slowest growth in 17 quarters.

Sales rose by 326% year-over-year to $2.65 billion in FY21, and profits increased by almost 3,000% to $672 million. Then in FY22, revenue increased by 55% to $4.1 billion year-over-year.

Worryingly, the number of Zoom customers contributing more than $100,000 in trailing-12-month revenue missed consensus estimates, only rising by 45.9% year-over-year. These customers are usually a more stable source of income than smaller contracts, and show Zoom is not attracting as many larger corporations as investors had predicted.

And during the pandemic, many investors sought a pure-play opportunity to take advantage of the business response to remote work changes. But as employment culture renormalises and monetary policy tightens, investors could be turning to Alphabet and Microsoft to take advantage of the defensive nature of their diverse operations.

But Daiwa Capital Markets analyst Stephen Bersey thinks that ‘given the recent tech-market pullback and a market rerating of valuation levels, we consider the new upside potential to our 12-month price target’ and has put an outperform rating on the stock.

However, Piper Sandler’s James Fish acknowledges a risk in ‘calling a bottom in shares given valuations in tech appear oversold,’ but thinks there is a ‘limited risk-reward’ at its current price, with better options available.

The long-term prospects for Zoom shares rest in the continued hybridisation of work. In the UK, the Office for National Statistics reported that more than a third of adults spent some time working from home in Spring, and 84% want to continue hybrid working. Similar employee opinion exists across the pond.

Benchmark Co’s Matthew Harrigan enthuses that ‘the fixation on Zoom as a Covid pandemic lockdown aberration is exaggerated as global tech and financial firms recognize the permanence of hybrid work.’

Meanwhile, Pedro Palandrani of Global X thinks that ‘we will need a reliable platform for virtual communication to supplement in-person meetings, and there is a strong sentiment in Zoom’s favor already from a user perspective.’

This could make Zoom shares excellent value at their current price point. They now have a price-to-earnings ratio of 26.5, compared to an absurd 225 in October 2020. And unlike many fellow Nasdaq stocks, it was highly profitable at IPO, remaining so even as growth slows down. This makes it far less vulnerable to the whims of the Federal Reserve.

Zoom’s share price might now be fairly valued to consolidate gains after its rapid pandemic growth.

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