Zoom Video Communications (ZM -3.57%) turned in another impressive earnings report for the first quarter of fiscal 2022. Revenue came in slightly above expectations at $956 million for a year-over-year increase of 191%. Zoom reported non-GAAP earnings per share of $1.32, compared to $0.20 in the year-ago quarter. Adjusted earnings beat the consensus analyst estimate by 33%.
Taken at face value, these results look great, but what's clear is that growth is quickly decelerating from the 300%-plus revenue growth rates reported last year. Management issued forward guidance that calls for revenue to grow approximately 50% in fiscal 2022.
The stock is currently down 45% from its 52-week high of $588, so investors are probably wondering if they should buy, sell, or hold this growth stock. Let's look at where Zoom's business currently stands to get a better understanding of the stock's value right now.
Growth will get more challenging
Zoom's acceleration in calendar 2020 was no fluke. It is widely viewed as the leader in video calling, and that's despite increasing competition from Alphabet's Google G Suite, Microsoft's Teams, and several other providers of video conferencing software. Gartner Research named Zoom a leader in its 2020 Magic Quadrant for Meeting Solutions -- the sixth consecutive year Zoom has appeared in this highly regarded report. Moreover, Zoom was named the most preferred video conferencing app by Okta's 2021 Businesses at Work Report.
But when deciding whether to buy a stock, it's important to consider what is already baked into the valuation. Zoom's qualitative factors are well reflected in the stock's high price-to-sales ratio of 29. While there's more to a company's intrinsic value than a single metric, a high valuation in the face of decelerating growth is typically not a recipe for great returns, which is likely the one factor weighing on Zoom's share price performance this year.
Investors should be aware that Zoom's triple-digit growth is likely in the past. This is because much of Zoom's growth during the pandemic was due to new customers signing up. But in the last quarter, Zoom's revenue growth was more evenly split between new and existing customers.
In the fiscal Q1 earnings report, Zoom reported that existing customers accounted for 43% of incremental revenue. That's a much higher percentage than last year, when Zoom reported that existing customers only made up 19% of revenue growth in fiscal second quarter 2021. This shows that Zoom will have to rely more on upselling existing customers to drive incremental revenue growth, which is a more difficult task than simply signing up new users.
Fortunately, Zoom has already been transitioning to a platform strategy to upsell existing customers to other services, such as Zoom Phone, Zoom Webinars, and Zoom Rooms. In fiscal Q1, the company reported a trailing-12-month dollar retention rate of 130% for businesses with 10 or more employees, which shows the average customer spending more with Zoom than a year ago. This metric has remained at 130% or higher over the last year, which says one thing above all: Zoom has a very competitive offering that is tough to beat.
Is the stock a buy?
On a forward price-to-earnings basis, Zoom trades at a multiple of 68, which is high but not astronomical for a business that is revolutionizing how people communicate.
Even though growth is slowing, Zoom can still grow at high rates for several more years. During the earnings call, CEO Eric Yuan offered the results of a survey that suggest many businesses are going to maintain some form of virtual communication with employees beyond the pandemic.
"In a recent survey we conducted, 80% of U.S. respondents agreed that all interactions will continue to have a virtual element post-pandemic, and that figure was even higher in many of the other markets we surveyed," Yuan said.
The recent pullback has taken a lot of the froth out of the share price, so investors are getting a better deal at these levels. However, I might wait another quarter to see how Zoom performs before buying shares.
It is possible management is being conservative with its full-year guidance for 50% revenue growth. After all, that is an upward revision to previous guidance, so I would look to see if Zoom outperforms management's expectations in the next few quarters. If that happens, that might be a good reason to buy shares of this growth tech stock.