Stock of the week - Zoom Video Communications (24.11.2021)

• Shares of Zoom Video plunged almost 15% on Tuesday

• Fiscal-Q3 results slightly better than expected

• Slowdown in large client growth

• Customers spend more with the company

• Zoom plans to launch its own cloud contact center software in early-2022

Shares of Zoom Video Communications (ZM.US) slumped almost 15% yesterday. Company that was dubbed as one of the "pandemic winners" disappointed greatly with its fiscal-Q3 2022 earnings report. Stock finished trading at the lowest level since June 2020 and almost 65% below its record high reached in mid-November 2020. Let's take a closer look at the results reported by the company.

Headline results beat estimates

Zoom Video Communications released fiscal-Q3 2022 earnings report (August-October 2021 quarter) on Monday after the Wall Street session closed. Earnings per share were reported at $1.11 per share, slightly above the median estimate of $1.10. Sales reached $1.05 billion during the quarter, also slightly higher than $1.02 billion expected by the market.  Revenue growth during the quarter slowed to 35% YoY, down from 54% YoY in the previous quarter. Sales growth is expected to slow down further in the final quarter of fiscal-2022 as the company projects sales of $1.051-1.053 billion, representing a growth of around 19% YoY. Adjusted earnings per share are expected to come in at $1.06-1.07.

Client growth slows

While headline results of Zoom in fiscal-Q3 managed to beat market estimates, investors are concerned about growth prospects. Not only revenue growth is expected to slow further in fiscal-Q4 but the company also reported lacklustre customer numbers for fiscal-Q3. Zoom said that it had 512.1 thousand customers with more than 10 employees - a closely watched metric by investors. This represents an increase of just 1.4% compared to the previous quarter and marks a continued slowdown following an exponential growth during pandemic-hit 2020. On the other hand, the company continues to increase its base of customers generating annual sales exceeding $100,000. While this is a positive, slower expansion of the customer base (>10 employees) may serve as a brake on growth in the coming quarters.

Zoom's customer growth decelerated following last year's pandemic boom. However, the company continues to increase the number of clients with annual sales exceeding $100,000 at a decent pace. Source: Bloomberg, XTB

Bad year for company and shareholders

So far, 2021 was a bad year for Zoom Video Communications and its shareholders. Stock slumped dropped almost 40% year-to-date and almost 65% off the all-time high reached in November 2021. Zoom also withdrew an offer for a merger with Five9 (FIVN.US), a cloud contact center software company. Zoom wanted to acquire Five9 for $14.7 billion via stock swap. However, as Zoom' stock continued to drop, proxy advisory advised shareholders to vote down the proposal causing Zoom to withdraw an offer. US regulators also launched an investigation into potential for foreign participation following the merger. However, the company's plan to expand into cloud contact center software business was not abandoned. Zoom Video plans to launch its own cloud contact center software at the beginning of 2022.

Technical Analysis

Shares of Zoom Video Communications (ZM.US) have been trading in a downward channel since the end of the last upward correction in August 2021. Disappointing customer growth and poor future outlook weighted on the share prices yesterday, pushing it below the mid-term price zone at $245.00. The stock was trading almost 20% lower at one point of the session yesterday. Daily low was reached just a touch above the 161.8% exterior retracement of the upward correction from May-July 2021. This is a key support to watch now. Stock trades slightly lower in pre-market today, suggesting that a relief may not come soon.

Source: xStation5