Yesterday, Monday, August 30, 2021, video communications giant Zoom (ticker: ZM) released its earnings report for the second quarter of the 2022 fiscal year (Q2 FY2022) after the closing bell of regular trading. The report, just like those the company has released in the previous quarters since the onset of the coronavirus pandemic, has exceeded analysts’ expectations both on the top and bottom line.
Zoom’s Q2 FY2021 shows that the company earned a net income of $316.9 million, or Earnings Per Share (EPS) of $1.04. This is a big jump from the figures the company reported in the same quarter 12 months ago, where the company reported a net income of $185.7 million, or EPS of 63 cents. Zoom’s adjusted net income was $1.36 a share and in this quarter, the company’s revenue soared 54% to $1.02 billion from $663.5 million in Q2 FY2021.
According to FactSet, analysts that were surveyed expected an adjusted net income of $1.16 a share on revenue of $991 million. Zoom’s growth has slowed in this quarter and this is attributed to the fact that more employees are going back to offices and students are going back to schools after spending more than a year doing business online which had boosted the company’s growth. After releasing the report yesterday evening, Zoom’s stock plummeted nearly 10%, and it has been down 12.6% in the premarket trading session this morning.
Although this is the case, Zoom achieved its first billion-dollar revenue quarter in Q2 FY2022, allowing the company stay hugely profitable and accumulate a big cash flow.
Unlike big tech companies like Apple Inc. (ticker: AAPL) and Microsoft Corporation (ticker: MSFT) among others that have shied away from issuing guidance for the next quarter or the rest of the fiscal year due to the uncertainty of the times we live in, Zoom issued it guidance to investors and analysts for its third quarter of the 2022 fiscal year (Q3 FY2022).
In Q3 FY2022, Zoom expects to post an EPS of between $1.07 and $1.08 of adjusted earnings, slightly lower than what analysts surveyed by FactSet who expect the company’s adjusted EPS in the quarter to be $1.10.
Any company would be smiling with sales growth of 54% in a year over year period, Zoom might be feeling a little bit less enthusiastic. This is because, even with 54% growth in sales in the past 12 months, it is Zoom’s smallest year-over-year growth in revenue for the company in its 11-year history. FactSet has tracked Zoom’s revenue growth since 2018 before the company even went public, and the smallest growth it has recorded was 77.9% in the first quarter of its 2021 fiscal year (Q1 FY2021) that ended on January 31, 2020, just before the onset of the pandemic that forced people to opt for working from home, a move that in turn hugely benefitted Zoom and other cloud services companies like Salesforce and its now subsidiary, Slack, Microsoft, and Amazon among others.
Could this be the end of Zoom’s rally? The economy is opening more and continuing its upward trajectory on the road to recovery. More employers are encouraging employees to go back to the office especially those that have been fully vaccinated against the coronavirus, and more schools and universities are opening their doors to students attending physical lessons, even with prevention measures still in place.
Zoom’s guidance does not help matters., as it shows the company’s growth will slow even further. With an anticipated adjusted EPS of between $1.07 and $1.08 in Q3 FY2022, the company would register year-over-year sales growth of 31.2% from the same quarter 12 years ago. See this is growth, but it is also a decline in growth at the same time.
Another factor that comes into play, and which would work in favour, ironically, of Zoom is the delta variant of the coronavirus. The variant seems to have a grip tight on the U.S. populations and other countries across the globe and it could be a big risk to the economy. The delta variant impact is so serious that it was even addressed by the Chairman of the Federal Reserve Bank Jerome Powell during the virtual Jackson Hole Symposium last week, saying that tapering the economy now in light of the surging coronavirus infections due to the delta variant could affect the recovery of the U.S. economy.
While speaking during the earnings call yesterday, Zoom Chief Financial Officer (CFO) Kelly Steckelberg said that the ever-changing nature of the coronavirus pandemic makes it hard for the company to project its precise performance in the current quarter and beyond.
Steckelberg noted that more people are now socializing and working in person, compared to video-conferencing that had been adopted in the peak of the pandemic. This has slowed down Zoom’s online business segment.
Some good news that could put a smile on the faces of Zoom investors is a note that was issued last week by Meta Marshall, an analyst at investment and financial services company Morgan Stanley (ticker: MS). The note, as reported by Market Watch, raised Zoom’s price target from $360 a share to $400, and raising its rating from equal weight to overweight. Marshall had been covering Zoom since May 2009, only a month after its Initial Public Offering (IPO).
Marshall’s note gives a ray of hope to investors who have seen the value of their investment in Zoom drop as much as 40% since the company’s stock price peaked at $568.34 by close of regular trading on October 19, 2020. That was when remote working was the first choice for employers, clients and employees, but it was also a few weeks before Pfizer and BioNTech announced that they had discovered the vaccine to coronavirus. The company has never reached those highs since then.
Currently, Zoom has a market capitalisation of $86.87 billion, and its shares, which have gained 3% year to date, are currently going for $290.45 a share. Zoom has underperformed the benchmark S&P 500 index, which has risen 20.6% year to date.