A company’s stock price is supposed to rise when it reports better than expected revenue and earnings growth and boosts its forecast.
That raises the question: Why were shares of San Jose, Calif.-based Zoom Video down over 9% in pre-market trade on November 23?
After all, yesterday Zoom reported growth that exceeded expectations and raised its forecast above analysts’ estimates.
The answer, according to Bloomberg, is that analysts track a bespoke indicator for Zoom — the growth in the number of its customers that employ 10 or more people. On that front, Zoom is sending analysts running for the hills.
Does this make Zoom — whose shares are down 33% in 2021 while the S&P 500 is up 25% — a bargain?
I don’t think so because — as Zoom was during the pandemic and no longer is — other companies growing at triple-digit rates are soaking up the capital of investors looking for high investment returns.
(I have no financial interest in the securities mentioned in this post).
Zoom’s Expectations-Beating Quarter
Zoom reported better than expected growth for its third quarter which ended in October and it forecast faster than expected fourth quarter growth.
According to CNBC, Zoom reported 35% growth in the quarter to $1.05 billion — which was $30 million more than analysts tracked by Refinitiv expected. Net income rose 71% to about $340 million.
Growth is forecast to keep slowing down. In its second quarter, Zoom’s revenues grew 54% and they are expected rise a mere 19% to about $1.052 billion — $32 million more than analysts expected, according to CNBC.
Zoom’s Decelerating Growth In New Customers
Zoom did not exceed expectations on all fronts. As Bloomberg reported, Zoom disappointed investors for the second quarter in a row with its projection for its count of large customers. In the second quarter, Zoom’s 36% pop in the number of big clients was below expectations.
In the third quarter, Zoom disappointed again. It reported an 18% increase in the number of large customers — which missed the analyst estimate of 516,174.
Sadly for investors, this rate of growth represents a massive slamming on of the brakes after the pandemic sent its customer count soaring. In the first quarter of 2021, “Zoom’s number of large customers jumped 87%, and in 2020’s third quarter, still in the height of Covid-19 lockdowns, the increase was 485%,” wrote Bloomberg.
Microsoft Teams Cuts Into Zoom’s Core Business
Zoom’s growth slowdown is not solely due to unfavorable comparisons to the first year of the pandemic when the videoconferencing company’s service was in huge demand as people worked from home.
Zoom is also suffering from competition from Alphabet and Microsoft. As the Wall Street Journal reported, Microsoft’s Teams application, which combines videoconferencing and other collaboration features, reached a record 250 million monthly active users in July.
Microsoft CEO Satya Nadella highlighted the unique value proposition to customers. As he told investors in 2020, \Teams is the only solution with meetings, calls, chat, content collaboration, as well as business process workflow in a secure, integrated user experience. And as companies move online, they also want one unified platform for meetings to form systems, which Teams delivers.\
What’s more, Microsoft is investing to make Teams more widely used in the future. Microsoft intends to make Teams available to all Windows users in its next version of the operating system. And it is working with Facebook to plan “what remote-collaboration workspaces could look like through virtual worlds known as the metaverse,” noted the Journal.
Can Zoom Resume Triple-Digit Growth?
I admire Eric Yuan’s entrepreneurial accomplishments. As he told me in September 2017, he left Beijing in 1997 to be the founding engineering of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.
In 2011, Yuan left to start Zoom because he was not happy with the way Cisco was managing WebEx when he left in 2011. As he said, \I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?\
He could not convince Cisco management to fix the problems. As Yuan explained, \Cisco would not change its collaboration strategy. I said I had a different view and left Cisco. 35 to 40 WebEx engineers left with me. We are growing thanks to our simplicity, quality, features and price and we have a very high net promoter score of 69.\
Thanks to those customer-friendly product features, Zoom was the go-to videoconferencing solution for people abruptly working from home as the pandemic struck in March 2020.
That resulted in triple-digit growth in revenue. But is Zoom making the right investments to return to that level of growth?
That remains to be seen. Its deal to acquire Five9, a cloud-based customer-service software provider, for about $15 billion fell apart in September and now Zoom plans to introduce its own version of the service.
Zoom is boosting R&D by 169% to $68 million. As Yuan told investors on November 22, “We are working hard to develop and deploy the technologies of the future to address current business needs and reimagine how we communicate and work in a flexible hybrid world.”
Zoom is planning to make more money by displaying ads to users of its free basic service and it anticipates winning new growth from Zoom Phone, its cloud-based phone business, noted the Journal.
Reasons for optimism? Zoom is expanding its usage within big organizations noting that over 2,500 customers are spending more than $100,000 a year, up 94% from the same period a year earlier, noted the Journal.
In addition, Kelly Steckelberg, Zoom’s CFO told investors that there is growing demand for its Zoom Rooms software “as organizations equip conference rooms for meetings with participants who are not on site,” wrote the Journal.
Zoom — 4.7% of its shares were sold short at the end of October — faces a big challenge to restore the 61% of value lost value since its shares peaked in October 2020.
For that it needs the faster growth that it was hoping the Five9 deal would provide. It does not inspire confidence that Yuan quipped to analysts that they should “[reach out if they know] any other cool companies that can help us, you know, to beef up our investment on that front,” noted CNBC.