Zoom Q2 2021 – No prisoners

Zoom gets punished for a tiny slip again.

• Zoom again demonstrates that when the multiples are very high, any tiny slip compared to expectations will be harshly punished by the market.
• Zoom reported good results and guided nicely for the coming quarter but the bugbear of post-pandemic growth continues to dog the company which turned a 9% rally into a 6% decline giving a total negative move of 13.8% within one hour.
• Q3 2021 revenues / adj-EPS was $1.05bn / $1.11 ahead of forecasts of $1.02bn / $1.10.
• Furthermore, guidance also just beat forecasts with revenue of around $1.05bn for Q4 2021 expected compared to consensus of $1.02bn.
• This all sounds well and good, but the company missed one of its core metrics which is the number of customers with more than 10 employees which came in at 512,100 which missed the consensus estimate of 516,174.
• This has been a continuing trend as Zoom also missed this metric in Q2 2021 and growth in these customers is slowing more rapidly than expected.
• Zoom remains the best video conferencing system available but its competitors are beginning to leverage their other assets to improve the customer experience.
• As a single product company, this is much more difficult for Zoom which combined with a slower outlook for video conferencing as the world slowly returns to normal is going to hurt.
• Microsoft, Meta, Google, and so on are all working on extending their platforms into the Metaverse for advanced enterprise collaboration and are spending billions to do it.
• Zoom does not have these kinds of resources and although the Metaverse is many years away, this could rapidly become a problem for Zoom when competing against the behemoths.
• It still has a better solution than the rest but the gap between it and the others is closing which increasingly makes me wonder if it will survive on its own.
• Furthermore, the valuation (even now) remains uncompelling.
• Despite falling more than 50% from their high, the shares still trade on 52.0x 2021 PER and 17.6x 2021 EV / Sales which is substantially higher than Microsoft which looks to have a much more secure long-term future.
• Hence, I can see Zoom continuing to fall and at some point, it may be acquired by someone looking to round out their digital work ecosystem.
• I am still happy to stay on the sidelines for this one.