Zoom Video Communications (ZM -2.25%) became synonymous with video calls during the pandemic. Its simple interface and catchy brand stood out in a sea of complicated enterprise-oriented solutions, and its free tier attracted millions of new users and converted many of them into paid subscribers.
Zoom went public at $36 per share two years ago, and its stock now trades in the $350s. Its growth rates have been astounding -- its revenue rose 88% in fiscal 2020 (which ended in January 2020), then surged 326% to $2.65 billion in fiscal 2021. Its adjusted net profit increased more than six times year over year in fiscal 2020, then rose nearly tenfold to $996 million in fiscal 2021.
Image source: Zoom.
But the bears have repeatedly claimed Zoom's stock was overvalued, it faced too many competitors, and that its growth would decelerate after the pandemic ended. Despite those pressing concerns, Zoom has continued to dominate tech and financial headlines over the past two months, for five main reasons.
1. Its impressive first-quarter report
On June 1, Zoom posted its first-quarter numbers. Its revenue rose 191% year over year to $956 million, beating the midpoint of its own estimates by $54 million. Its adjusted net income surged 590% to $402 million, or $1.32 per share -- which beat analysts' estimates by $0.34 per share.
Zoom also continued to gain larger customers. Its number of customers contributing more than $100,000 in revenue over the past 12 months jumped 160% year over year. Its number of customers with more than 10 employees increased 87% to roughly 497,000.
Zoom also raised its guidance for fiscal 2022. It now expects its full-year revenue to increase 50%-51%, compared to its previous target of 42%-43% growth. It expects its adjusted earnings to rise 37%-38%, compared to its earlier forecast for just 7%-9% growth. Those rosy expectations indicate Zoom still has plenty of staying power as a growth stock -- even if its growth decelerates.
2. The expansion of its ecosystem
Since its IPO, Zoom has expanded its ecosystem with new collaborative features for Zoom Rooms, deeper integration with other platforms like Microsoft Teams, and more robust security features.
Image source: Zoom.
That expansion continued over the past month, with the rollout of its new Zoom Phone Appliances, Zoom Apps, and Zoom Events. Its Zoom Phone Appliances, which are powered by third-party hardware from Poly and Yealink, are all-in-one devices that provide HD video meetings, phone calls, and interactive whiteboards. These devices could tighten Zoom's bonds with its existing users, while disrupting older enterprise communication appliances from companies like Cisco (CSCO -0.52%).
Zoom Apps integrate third-party apps from the company's app store into Zoom Meetings. Zoom Events, meanwhile, is its new platform for hosting large events like sales summits, trade shows, internal conferences, and customer events. These new features could all strengthen its brand and widen its moat against rivals like Cisco's Webex.
3. Its $14.7 billion takeover of Five9
On June 18 Zoom agreed to buy Five9 (FIVN -4.58%), a cloud contact center provider, for about $14.7 billion in an all-stock deal.
The acquisition surprised many investors, but Zoom claims the deal will "enhance" its presence with enterprise customers and build its presence in the $24 billion cloud contact center market. The purchase could accelerate Zoom's evolution from a video conferencing platform into a cloud communications giant, but it could also throttle its near-term earnings growth since Five9 is still unprofitable.
4. Kaltura's IPO
A few days after Zoom agreed to buy Five9, its video conferencing rival Kaltura (NASDAQ: KLTR) went public. Kaltura's Video Experience Cloud enables its clients to create live, on-demand video for about 15 million end users. Its growing list of roughly 1,000 clients includes 25 of the U.S. Fortune 100 companies, as well as over half of the country's R1 educational institutions.
Kaltura is smaller than Zoom and generating slower growth. Its revenue rose 24% to $120.4 million last year, but its net loss widened from $15.6 million to $58.8 million.
Nonetheless, Kaltura lists Zoom as a top competitor in its S-1 filing, and that association seemed to attract some bulls. Kaltura priced its IPO at $10 per share, and the stock closed at $12 a share on the first day.
5. The SPAC rumors about Cvent
Lastly, Zoom could be in talks to invest in Cvent, an event-management software company, through a deal with the special purpose acquisition company (SPAC) Dragoneer Growth Opportunities II (DGNS). Zoom could take a 10% stake in the new company, and the investment would complement its live events strategy.
The bottom line
Zoom trades at nearly 80 times this year's earnings and nearly 30 times this year's sales. If you believe it will lose its momentum after the pandemic and be overrun by its competitors, then its stock might seem ridiculously expensive.
But if you believe Zoom will maintain its lead, retain its momentum after the pandemic, and evolve into a cloud communications giant, it's still reasonably valued. I personally prefer this thesis -- Zoom clearly has an edge against its rivals, and it's wisely leveraging that strength to evolve and expand.
