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3 Ways Zoom's Earnings Report Was Better Than It Seemed

By Demitri Kalogeropoulos – Nov 24, 2021 at 6:52AM

Key Points

  • Sales trends are slowing dramatically compared to pandemic highs.
  • Zoom is still highly profitable and growing its influence in the virtual workspace.
  • Customers appear eager to try its latest sharing-tool innovations.

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A growth slowdown was bound to happen.

The stock of Zoom Video Communications (ZM 7.39%) isn't a Wall Street darling anymore. Share prices slumped following its third-quarter earnings report on Tuesday. The video communication specialist's stock is also down significantly so far in 2021.

But the pessimism is due to a fixation on the short-term outlook, which is admittedly cloudy as people return to the office following almost two years of remote working. Looking past the pandemic-related volatility shows just how much stronger the video communication business is today, though.

Let's tick off three ways that Zoom is succeeding as a growth stock right now.

A man making a video call from home.

Image source: Getty Images.

1. Zoom put another $1 billion on the books

Sure, sales growth looks weak compared to last year. Revenue expanded just 35% in the third quarter after rising by around 300% in 2020. The company is facing major headwinds in its online platform that gained millions of new users when people were seeking a substitute for in-person meetings during the earlier phases of COVID-19. That demand boom is over.

But Zoom still logged over $1 billion of sales for its second straight quarter, meeting management's forecast and keeping the company on track for over $4 billion of revenue this year. Its base of big customers is expanding nicely, too, with the volume of large contracts roughly doubling again, year over year.

2. Zoom has solid profits and cash flow

Many growth stocks make investors wait years before showing solid financial results, but not Zoom. The company generated $400 million of operating cash this quarter and notched improvements in both profitability and earnings per share (EPS). Adjusted earnings so far this year have jumped to $1.2 billion, or double the amount from the previous period in 2020.

Management is feeling more optimistic on this point, too. It raised the 2021 earnings outlook and is now targeting per-share profit of between $4.84 and $4.85 compared to the prior range of $4.75 to $4.79. "We are well on our way to becoming an indispensable platform for enterprises, individuals, and developers to connect ... in the flexible hybrid world of work," CEO Eric Yuan said in a press release.

3. Zoom is winning on engagement

The most encouraging metric from the report had to do with Zoom's renewal rate with established users. These clients nearly all chose to stick with that platform, and most decided to deepen their relationship with the business. Zoom's average contract renewal was at a 30% higher annual rate for the 14th consecutive quarter, management noted.

That's great news for shareholders because it shows that Zoom can use its platform to grow its services well beyond the current portfolio of sharing tools. Some of the more exciting features it is working on include video-based desk sharing and whiteboard sharing, and a new events platform for company meetings.

These offerings will spark demand in a world of hybrid work where some portion of the employee base is away from the office most times. They don't require anything like the near-total work-from-home experience that characterized most of 2020.

Zoom's challenge over the next few quarters is to build and deliver engaging tools like these at a steady pace. That momentum is much more important for investors to follow than the short-term growth hangover that's happening today.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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