What happened
Shares of Zoom Video Communications (ZM 0.05%) went down early Tuesday after the company released one of the most impressive quarterly reports you'll ever see. Even with a strong outing and raised guidance, it wasn't enough to keep this market darling from going backward today. Investors are likely worried about the stock's valuation, and traders are looking to book profits. As of 10:30 a.m. EST on Tuesday, Zoom stock was down 13%.
So what
Zoom's fiscal calendar doesn't line up with traditional calendars; it just reported results for the fiscal third quarter of 2021, covering the beginning of August through the end of October. For this time period, the company's revenue was up a mind-numbing 367% year over year to $777 million. Growth at this scale crushed expectations and helped it book net income of $198 million, up from just $2 million in the same quarter last year.
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With the COVID-19 pandemic affecting many aspects of everyday life, Zoom has become a ubiquitous tool helping many people address their educational, work, and social needs. But this company may have already reached the peak of its pandemic-fueled growth. For the upcoming fiscal fourth quarter, it's guiding for $806 million to $811 million in revenue, which is 329% year-over-year growth at the midpoint.
Now what
Even with today's drop in price, Zoom stock is still up over 500% year to date. For momentum traders, these outsize gains are likely far too enticing to pass up considering the company's growth rate is expected to start moderating in coming quarters. Some of today's drop is undoubtedly attributable to those selling in search of the next big thing.
Even for long-term investors, one can appreciate the small dip in Zoom's stock price considering its current valuation. There are different ways to measure it, but for growth stocks like Zoom, a commonly utilized metric is the price-to-sales ratio. The company's current market capitalization is nearly $119 billion compared with guided full-year fiscal 2021 revenue of almost $2.6 billion. That's a forward price-to-sales ratio of over 45 -- extremely pricey.
That said, winning companies have a tendency of finding new ways to create shareholder value over time. Valuation metrics like the price-to-sales ratio are incapable of measuring these opportunities. This requires vision from individual investors like you and me as we research companies. For this reason, I'd be reluctant to count Zoom stock out on valuation concerns alone.
