In early 2020, if you wanted to keep working and continue connecting with friends and family, you likely found yourself using Zoom Video Communications' (ZM -0.99%) namesake app. The product became ubiquitous because of the pandemic; the company's revenue for fiscal 2021 (which ended Jan. 31) skyrocketed 326% year over year; and the stock trades over 300% higher than where it traded in January 2020.
On Aug. 30, Zoom released financial results for the second quarter of fiscal 2022. Since then, the narrative has focused on slowing growth, confirming for many that Zoom was just a pandemic stock and not worth owning now that there's a vaccine. But a closer look at a $265 million item within Zoom's billion-dollar top line completely shatters this widely held misconception.
Image source: Zoom Video Communications.
Take a gander at Zoom's incremental revenue
Even though we're roughly 18 months removed from the start of the pandemic, Zoom continues to win new business, dispelling the myth that it's "just" a pandemic stock.
In Q2, Zoom generated revenue of $1 billion, up 54% year over year. This increase was on top of its 355% year-over-year growth in the second quarter of last year. This means there was $358 million more on the company's top line than there was this time last year. And according to management, 74% of this incremental revenue -- or about $265 million -- came from new customers.
Granted, much of this new business came in the second half of last year. However, there are still companies that are just now signing up for Zoom's services for the first time. In fact, during Q2, Zoom added almost 8,000 new corporate customers (companies with at least 10 employees). Therefore, it's accurate to say Zoom's revenue is still growing without the pandemic catalyst.
Yes, growth is slowing. But...
When we talk about revenue growth, we're typically comparing numbers over a one-year span. In Zoom's case, its 326% growth in fiscal 2021 is compared to its fiscal 2020. But year-over-year growth rates always need context -- the comparison year is important as well. After all, horrid results one year make it a heckuva a lot easier to have relatively better results the following year.
Yes, Zoom's revenue growth rate is slowing down. With Q2 results, management gave guidance for the remaining quarters of this year. The following chart shows how the year-over-year growth rate looks for each quarter.
| Fiscal 2022 | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| YoY Growth Rate | 191% | 54% | 31%* | 15%* |
Source: Zoom quarterly press releases. *Implied growth rate from guidance.
In my opinion, growing revenue on top of last year's results is a phenomenal accomplishment for Zoom. Slowing growth in this case doesn't signify a dire situation like it might for a different company. Rather, it indicates quite a success.
Image source: Getty Images.
What now?
Zoom stock fell following the release of its Q2 results and now sits around 50% below its all-time high. Investors are counting this company out when it comes to creating future shareholder value. But considering it continues to gain new customers, I think it's wrong to count it out. And there are more reasons to believe Zoom can still be a winner from here.
Zoom has a great track record of increased customer spending, which continued in Q2. Its net dollar expansion rate for companies with 10 or more employees was over 130% again, continuing its streak of more than four years. In other words, these customers spent roughly 30% more money this past quarter than they did a year ago.
Zoom has many ways to continue to grow spending among existing customers. Right now, it's pulling its Zoom Phones lever -- its product for updating a company's office phone infrastructure. It's been about a year since the product launched, and it's already reached two million seats, up about 500,000 in Q2.
Zoom Events just launched in July, giving the company further optionality. With Zoom Events, organizers can create ticketed livestreams for events like concerts. But it has other applications as well. For example, a yoga instructor could use it to generate revenue for live classes.
All of this doesn't even include Zoom's pending acquisition of Five9 (FIVN -0.60%), which dramatically increases the company's total addressable market (TAM). By acquiring Five9's customer contact center market, Zoom's TAM is now estimated at $86 billion, an increase of 39%.
Could Zoom grow its TAM again in the future? This seems likely to me considering it now has over $5 billion on the balance sheet and is generating millions in quarterly free cash flow -- $455 million in Q2 alone.
Zoom is gaining new customers; old customers are spending more; and the company is loaded with a growing pile of cash. To me, this is a powerful combo that can make Zoom stock a long-term winner from here.
