High-growth tech stocks are getting beaten down so frequently that investors are holding their breath every time a company that thrived during COVID-19-related lockdowns reports earnings. Zoom Video Communications (ZM -0.82%) is the latest big stay-at-home stock to report, and investors were pleasantly surprised by what they saw.
Shares of the stock recently jumped higher after management presented results from its fiscal first quarter ended April 30, 2022. Total revenue rose 12% year over year to $1.07 billion as predicted by Wall Street analysts who follow the stock.
On the bottom line, earnings that came in 18% above consensus expectations at $1.03 per share got everyone's attention. Here are three reasons investors who buy this stock now can look forward to strong earnings growth and market-beating gains for years to come.
1. Zoom Video is already highly profitable
You're probably familiar with the free versions of Zoom Video you've installed to attend virtual meetings, so you might not realize how much demand Zoom is generating from deep-pocketed businesses. In the first quarter, Zoom had 2,916 customers that spend at least $100,000 annually, which was 46% more than it had a year earlier.
Zoom finished April with nearly 200,000 enterprise customers, which was 24% more than it had a year earlier. Those customers are eager to add on services, too. The company's net dollar expansion rate for enterprise customers is up a whopping 123% over the past 12 months.
With an asset-light operation, a surprising amount of revenue from Zoom's enterprise customers makes its way to the bottom line. The $501 million in free cash flow reported in the fiscal first quarter was 47% of total revenue during the period.
Image source: Getty Images.
2. Zoom Video looks like a bargain now
Zoom just reported fiscal first-quarter 2023 earnings that contracted slightly from the banner year that was fiscal 2022. Look back a little further and you'll see that Zoom's bottom line has soared by 1,680% over the past two years, while total revenue more than tripled. The stock, though, is trading at multiples you'd normally associate with businesses that grow by high single-digit percentages.
Despite rising sharply after its first-quarter report, shares of Zoom Video are trading for less than 24 times management's earnings expectations for the fiscal year that ends on Jan. 31, 2023. This is several times more than the average stock in the major indexes, but this business is poised to grow earnings at an above-average pace.
3. Multiple paths forward
There are plenty of businesses out there that need new communication services, but won't even consider Microsoft Teams because they can't expect their customers or employees to complete the required training. Widespread adoption of Zoom's free-to-use apps has gone a long way to help Zoom's salesforce market a growing menu of communication services.
For example, Zoom Phone didn't launch until 2019, but it's already one of the largest players in the unified communications as a service industry, with over 3 million seats. This means that among's Zoom's base of enterprise clients, there are already 3 million individual employees using Zoom Phone. That's around 50% more Zoom Phone seats being paid for now than the company reported less than a year ago.
Building on its success with Zoom Phone, the company launched a new contact center offering during the first quarter. To boost its efficiency, Zoom also acquired Solvvy. This is a conversational artificial intelligence platform that will allow Zoom's enterprise clients to address more customer concerns while employing a lighter workforce.
Zoom's contact center has already signed Humana, a health insurer with over 17 million members, and Avis, the giant rental car company. With multiple growth drivers beyond simple virtual meeting services, this stock still has a lot of climbing to do.
