Is Zoom Video Communications (ZM) a good investment after Q3 earnings?

Zoom Video Communications (NASDAQ: ZM) expanded its customer base at an accelerated pace during the COVID crisis and soon became the preferred video conferencing platform for businesses and millions of people working/learning remotely. Though it continues to grow even after the market reopening there is a marked slowdown, raising concerns that the company is headed for a challenging year ahead.

ZM was one of the fastest-growing stocks when movement restrictions forced employees and students to adopt video conferencing services to stay connected and attend online classes. But the stock changed course once the initial boom waned and new players started hitting the market. More recently, interest rate hikes and high inflation sent stock markets into a tailspin, adding to Zoom’s troubles.

Weak Guidance

The weaker-than-expected full-year guidance issued by the company recently didn’t go well with investors despite Q3 earnings and revenue beating estimates, and the stock dropped sharply following the announcement this week. With that, Zoom’s shares have reversed most of their COVID-era gains and are currently trading at the lowest level in nearly three years.

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Read management/analysts’ comments on quarterly reports

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From the investment perspective, the valuation doesn’t look good even at the current lows, in relation to the company’s earnings and free cash flow performance. In what could be a concern for investors, sales have been under pressure lately, reflecting macroeconomic challenges and softness in enterprise spending on technology. While the downtrend is likely to continue, the company also faces the risk of growing competition from other players like Microsoft Teams and Cisco’s WebEx.  

Buy ZM?

It is advisable to keep a tab on the company’s performance in future quarters before investing in it. Those who already own the stock might consider holding on until the picture becomes clearer. Meanwhile, the management is doing everything to stay on the growth path, with focus on innovation. It is betting high on the recent upgrade, incorporating new features like Zoom Mail and Calendar thereby making the platform an all-in-one service that enables users to create engaging virtual experiences.

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GOOGL Earnings: All you need to know about Alphabet’s Q3 2022 earnings results

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From Zoom’s Q3 2022 earnings call:

“Zoom is purpose-built to make all kinds of connections possible, effective, and meaningful. We have developed and launched more than 1,500 features and enhancements on the Zoom platform this year, advancing how people connect with each other, their organization, and their customers, ultimately, opening the doors wide for creativity and collaboration. Of course, even as we celebrate our innovations and customers, we still face the backdrop of a challenging macroeconomic environment.”

Q3 Outcome

Though revenues increased 5% to $1.1 billion in the third quarter it did not help the bottom line, rather adjusted earnings dropped 4% annually to $1.07 per share. In a sign that the weakness has extended into the current quarter, the management guided fourth-quarter earnings and revenue below the consensus estimates, triggering a stock selloff. It is worth noting that earnings exceeded estimates in every quarter since the company went public a few years ago.

Zoom’s stock ended Tuesday’s trading session sharply lower. Its value has more than halved since the beginning of 2022.