Zoom Video Communications Stock Is Up 13% In A Day, Why?

Zoom Video Communications stock (NASDAQ: ZM) price rose 13.1% on 22nd August, as compared to a nearly 1% decrease in the S&P500 index. In sharp contrast, Zoom Video Communications’ peer Microsoft (NASDAQ: MSFT) posted a 2% drop on that same day. The stock price jumped after the company announced its second-quarter results, beating the consensus estimates of revenues and earnings. It reported total revenues of $1.16 billion – up 2% y-o-y, mainly due to a 4% growth in the enterprise income. Further, ZM also raised the full-year revenue guidance for FY2025 (1st Feb – 31st Jan), with the top line expected to remain between $4.63 billion – $4.64 billion. Additionally, its board of directors authorized a share repurchase program of up to $1.5 billion of common stock.

Amid the current financial backdrop, ZM stock has suffered a sharp decline of 80% from levels of $335 in early January 2021 to around $70 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. Notably, ZM stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -45% in 2021, -63% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ZM underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including NVDA, AAPL, and SPWR, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ZM face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

The key business metrics of Zoom Video Communications are the number of enterprise customers and customers contributing more than $100,000 of the revenue for the past 12 months. Notably, both metrics witnessed growth in the last quarter. Further, the online average monthly churn was reduced by 30bps on a year-on-year basis. Overall, ZM’s growth numbers are promising, resulting in a $75 average of analysts’ estimates – around 10% above its current market price.

Zoom Video Communications’ revenues have seen a more than 7x growth from $622.7 million in 2020 to $4.53 billion in 2024. A big chunk of this increase was during the FY2021 and FY2022, due to the Covid-19 lockdowns.

ZM is a market leader in the video conferencing space. It has a strong user base of both enterprise and online customers. Further, its artificial intelligence (AI) initiative – AI Companion, is likely to strengthen its position in the remote video services market.  Overall, Zoom Video Communications is expected to continue its growth momentum in the coming years.

[1] Returns as of 8/23/2024
[2] Cumulative total returns since the end of 2016

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