Not a lot of companies can generate 300% revenue growth and still get shrugged off by the market.

Such is the case with Zoom Video Communications (NASDAQ:ZM), the videoconferencing phenomenon that's been arguably the biggest winner in the pandemic. 

The stock was down double digits on Tuesday despite another blowout quarter. Zoom posted 367% revenue growth to $777.2 million, and it delivered adjusted net income of $297.2 million, good for a net profit margin of nearly 40%, up from $25.2 million a year ago. On a per-share basis, adjusted earnings per share came in at $0.99 per share, easily beating estimates at $0.76, while its top-line result cruised past expectations at $694 million.

If there was a blemish in the report, it was that profit margins narrowed from the second quarter to the third quarter, owing partly to the dramatic increase in usage, especially in free users including K-12 schools as the new school year started. That led to a drop in gross margin in the quarter to 68.2%, below 82.9% in the quarter a year ago and 72.3% in the second quarter.

Still, the decline in gross margin seems to be mostly noise as the company gets a long-term tailwind even from free users.

A Zoom videoconference screen with four people

Image source: Getty Images.

A change in perspective

The most impressive numbers in Zoom's report can't be found in the year-over-year comparison. 

For a company growing as fast as the videoconferencing juggernaut, it's more useful to look at its growth rate on a quarter-over-quarter basis, especially given the dislocation from the pandemic, which has supercharged the company's growth. Comparing results from the third quarter to the second quarter shows the company still growing at a a strong pace, and adoption continuing to improve even with macroeconomic conditions holding essentially steady. Below are a few key metrics:

  • On a quarter-over-quarter basis, revenue grew 17%, or at an annualized rate of 87%, showing that the overall growth rate for the business continues at a blistering pace.
  • Customers with 10 or more employees also increased 17%, or 87% annualized, to 433,700. On a year-over-year basis, that figure was up 485%. 
  • The company had 1,289 customers contributing $100,000 or more in annual revenue, up from 988 in the second quarter, a 30% growth rate quarter-over-quarter or 189% on an annualized basis. 
  • Minutes on the platform increased on a quarter-over-quarter basis by 75% to an annual run rate of 3.5 trillion, driven in part by the reopening of schools.  

All of those numbers point to momentum building from the second quarter to the third quarter, an impressive feat given that demands for videoconferencing in some ways were highest during the lockdown when the initial shock of the pandemic struck.

Zoom's guidance also indicates that it expects that momentum to continue in the fourth quarter, calling for revenue of $806 million to $811 million, which is up 328% to 331% from the quarter a year ago, or about 4% growth on a quarter-over-quarter basis. Keep in mind that Zoom has blown past guidance in each of its two previous quarters, so its fourth-quarter guidance is likely conservative.

The big question facing Zoom

There's no doubt that Zoom has been a standout performer during the pandemic, as the stock is up 500% year to date even with Tuesday's pullback. Revenue, meanwhile, is on track to quadruple this year. However, the big question that lingers over the stock is how Zoom will perform once the pandemic ends. While there will almost certainly be a hangover from this year's astronomical growth rate, investors are still pricing in strong growth ahead, as the stock trades at a price-to-sales ratio of about 40 based on this year's expected revenue.  

However, the strong quarter-to-quarter growth offers one reason to believe that the company has what it takes to deliver for investors beyond the pandemic. It's gaining market share on competitors and asserting itself as the dominant videoconferencing provider.

The company is improving security and introducing new and enhanced features like virtual seating charts and easier unmuting. It's also making profits hand over fist, a pattern that should continue after the pandemic as the company expects gross margins to return toward pre-pandemic levels. Additionally, the pandemic has done the heavy sales and marketing lifting for it, as the brand and product are now household names.

Add it all up, and the post-earnings sell-off looks like misguided. For investors looking to catch a piece of this long-term growth stock, now looks like a great buying opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.