Get Ready To Buy Some Zoom Video Communication, Inc (NASDAQ:ZM)

The Market Punishes Zoom Video Communication, Inc

Zoom Video Communication (NASDAQ:ZM) is one of the biggest winners of the pandemic. The company experienced an exponential increase in customers, revenue, and traffic that, quite frankly, has yet to slow down. The company just reported its 3Q earnings and yet shares are down more than 13.0%, not because results fell short of the mark but because the market was expecting so much more. So much more, in fact, as to be unbelievable. What this means for us today is a buying opportunity.

“We remain focused on the communication needs of our customers and communities as they navigate the current environment and adapt to a new world of work from anywhere using Zoom. We aspire to provide the most innovative, secure, reliable, and high-quality communications platform to help people connect, collaborate, build and learn on Zoom,” said Zoom founder and CEO, Eric S. Yuan. “Strong demand and execution led to revenue growth of 367% year-over-year with solid growth in non-GAAP operating income and cash flow in our third fiscal quarter. We expect to strengthen our market position as we finish the fiscal year

Zoom Blows Past Consensus, Shares Fall

To say that Zoom Video had a great quarter is a bit of an understatement. Not only did the revenue grow above 350% YOY but it also smashed right through the consensus. The problem for the market is that, in a world where the average company is beating the consensus, it takes more than the 12% beat reported by Zoom to get the market excited. So, top-line revenue came in at $777.19 million. This is up 366.5% from the previous year and driven by strong gains across all business sizes.

On a sequential basis, the revenue is up 17% and accelerating versus the general expectation for F2021 revenue growth to slow from the prior quarter. Revenue strength was driven by triple-digit increases in customers. On a comparative basis, the number of customers contributing more than $100K to revenue increased by 136% while the number with more than 10 employees surged 485%.

Moving down to the bottom line, the company’s earnings were also much better than expected. The GAAP earnings of $0.66 beat the consensus by $0.14 while adjusted EPS of $0.99 beat by a quarter. Looking forward, the company expects growth to continue on a sequential basis into the 4th quarter and at a rate above prior guidance. Zoom now expects revenue in the range of $806 to $811 million with EPS near $0.88. The only bad news is that sequential growth will slow to a mere 4% and YOY to only 310%.

In terms of operations, the company produced $388.2 million in free-cash-flow or 49.9% of revenue. The cash position was increased to $730.4 million most of which is unrestricted. The company’s debt load is so low it’s almost unmeasurable providing ample liquidity for growth or acquisitions.

The Technical Outlook: Zoom Corrects Get Ready To Buy

Shares of Zoom corrected more than 13% in the early hours of trading following the 3Q release. The move is due more to over-zealous market expectations than to the company’s results which are notably strong. The move lower has shares trading below the short-term moving but still well above the bottom of a recent trading range. The range began in late summer following the 2Q release and may dominate price action for the short to mid-term. Investors should target the bottom of the range as a potential entry point assuming price action falls that far. Until then, watch for signs of buying support in the range of $360 to $400.