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Zoom Video: Highly Profitable, but Competition Is Steep

Zoom Video Communications (NASDAQ:ZM) is a very interesting company. Its name has become synonymous with video conferencing over the past couple of years, as it has been one of...
Zoom Video: Highly Profitable, but Competition Is Steep © Reuters. Zoom Video: Highly Profitable, but Competition Is Steep

Zoom Video Communications (NASDAQ:ZM) is a very interesting company.

Its name has become synonymous with video conferencing over the past couple of years, as it has been one of the ultimate beneficiaries of the COVID-19 pandemic.

Zoom revenues quadrupled in 2020, as the work-from-home economy became the new norm. Due to the company's fantastic scalability prospects, Zoom also enjoys jaw-dropping margins, which keep on expanding as its customer count grows.

In its latest quarterly results, Zoom reported year-over-year revenue growth of 54% to $1.02 billion. Net income grew 70.5% to $317 million, with net income margins expanding to around 31%.

Even if Zoom's revenue growth decelerates, it's quite likely that a margin expansion alone will keep satisfactory bottom-line growth levels due to how capital-light the company's business model is.

I am bullish on the stock. (See ZM stock charts on TipRanks)

Bolstering Growth Through Five9 (NASDAQ:FIVN)

Earlier in July, the company capitalized on its ongoing momentum by announcing a $14.7-billion all-stock agreement to acquire Five9 (FIVN).

Hence, besides its own growth in the video conferencing space, Zoom should be able to unlock synergies and operational efficiencies with Five9's platform.

Five9 features last-12-month revenues of $521.7 million. At its current price, the company is trading at around 18.5 times its forward sales.

Considering that Five9's revenues grew 44% last quarter, Zoom does not appear to be heavily overpaying in this deal. That is especially the case if you assume that the merger will accelerate the financials of both companies.

It's worth noting that Zoom performs greatly on the Rule of 40 too, which provides a useful benchmark for SaaS companies. Its 31% net margins, and 54% revenue growth assign it a score of 85 (a score above 40 is regarded as excellent).

Risks Remain

Despite Zoom's attractive characteristics, risks remain.

Firstly, the company faces steep competition.

While various companies such as Cisco Systems (NASDAQ:CSCO) offer their respective video conferencing solutions, it is Microsoft's (NASDAQ:MSFT) Teams that may redirect some of Zoom's customers. This is because Microsoft can bundle Teams with its Office suite.

Considering Zoom's forward P/E of 58.2, if competition materially slows down its growth in a post-COVID-19 world, shares are likely to take a hit.

Further, management guided for Q3 2022 revenues between $1.015 billion and $1.020 billion, suggesting growth of around 31% year-over-year.

This rate definitely shows signs of a slowdown, which, while natural and expected, could be worrying if Zoom's net margin expansion also slows down in the short-term.

Wall Street’s Take

Turning to Wall Street, Zoom has a Moderate Buy consensus rating, based on 10 Buys, and eight Holds assigned in the past three months. At $375.85, the average ZM price target implies 31.9% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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19-09-2021 17:42:31 (UTC+7)

EUR/USD

1.1724

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EUR/USD

1.1724

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GBP/USD

1.3736

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USD/JPY

110.00

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US Coffee C Futures

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4,130.84

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Adidas AG

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 EUR/USD1.1724↑ Sell
 GBP/USD1.3736↑ Buy
 USD/JPY110.00Sell
 AUD/USD0.7267↑ Sell
 USD/CAD1.2768Neutral
 EUR/JPY128.97↑ Sell
 EUR/CHF1.0933↑ Sell
 Gold1,753.95↑ Buy
 Silver22.358Sell
 Copper4.2393↑ Buy
 Crude Oil WTI71.97↑ Buy
 Brent Oil75.31↑ Buy
 Natural Gas5.061↑ Sell
 US Coffee C186.75Buy
 Euro Stoxx 504,130.84↑ Buy
 S&P 5004,432.99Neutral
 DAX15,490.17↑ Buy
 FTSE 1006,963.64↑ Buy
 Hang Seng24,920.76↑ Buy
 Small Cap 20002,233.92↑ Buy
 IBEX 358,760.90↑ Sell
 BASF63.085↑ Sell
 Bayer45.07↑ Sell
 Allianz190.23↑ Sell
 Adidas281.60↑ Sell
 Lufthansa8.210Neutral
 Siemens AG148.76↑ Sell
 Deutsche Bank AG11.080↑ Sell
Mua/Bán 1 chỉ SJC
# So hôm qua # Chênh TG
SJC Eximbank5,600/ 5,665
(5,600/ 5,665) # 809
SJC HCM5,600/ 5,665
(0/ 0) # 830
SJC Hanoi5,600/ 5,667
(0/ 0) # 832
SJC Danang5,600/ 5,667
(0/ 0) # 832
SJC Nhatrang5,600/ 5,667
(0/ 0) # 832
SJC Cantho5,600/ 5,667
(0/ 0) # 832
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JPY202,13213,83
KRW16,7120,34
Cập nhật lúc 17:37:47 19/09/2021
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