Zoom Video Communications Valuation Is Realigned With Reality

Zoom Video Communications (NASDAQ: ZM) share price zoomed into the stratosphere when the pandemic gripped the world but those days are long over. Now, after correcting about 85% from the post-pandemic peak, the stock is finally back down at a level that looks attractive. The Q2 report was a mixed bag of results that includes weak guidance but there is a takeaway for investors to contemplate. 

Zoom Video Communications guidance was lowered to a range below the Marketbeat.com consensus figures but growth is still present and, more importantly, so is profitability. How many tech stocks, especially young growth-oriented startups like Zoom Video Communications, can say they have positive earnings at this stage in the game? So, while growth is slowing, the company is maturing and its valuation is far more palatable. Trading at roughly 22X its earnings the stock is not only cheap compared to other tech growth stocks but to blue-chip tech names like Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) as well. 

Mixed Results Weigh On Zoom Video Communications

Zoom Video Communications reported a mixed quarter but that is only with respect to the analysts' estimates and the comps to prior years. The company reported $1.1 billion in net revenue for a gain of 7.8% which missed the analysts' consensus by 180 basis points but is up in the range of 900% over the last 3 years. In that light, and with the pandemic receding, it’s no wonder that growth has slowed, the key point is that this company is still growing and its client base is maturing. The number of customers contributing more than $100,000 in revenue grew by 37% YOY and is underpinning the company’s growth. 

Moving down to the margin and earnings, the news gets better although the full-year guidance is weak. The company’s GAAP and adjusted operating margins shrank on a YOY basis but far less than anticipated. The adjusted margin of 35.8% put EPS at $1.05 per share which is down from last year but $0.12 better than expected but the strength was not enough to support the previously released guidance. The company lowered its ranges for Q3 and FY22 revenue and earnings to below the consensus figures which has the analysts downgrading the stock and lowering their targets even more. 

At least 13 of the 30 analysts rating Zoom Video Communication came out with commentary in the wake of the report and it all includes a price target reduction. The single downgrade to Neutral has the Marketbeat.com consensus figure pegged at a Strong Hold, a rating that has held steady over the last year, while the price target came down considerably. The new targets include a new low of $76 which assumes some downside for the market, and the consensus is down more than 50% over the last year, but the general take is this stock is undervalued by 70%. 

The Technical Outlook: Zoom Video Communications Sell-off Is Overextending 

The Q2 news and guidance have shares of ZM moving lower and they could move even lower but the risk is to the upside for this market. The sell-off not only appears to be overextending on the weekly charts with stochastic and MACD divergent from the new lows but the company’s health is good. The growth is slowing but the growth is there and profitability is present as well. The stock may move lower but a bottom will be reached soon and a reversal could begin as soon as the next earnings reporting season. Until then, investors should watch the $80 level because there are signs of support on the daily chart and the potential for bottoming at this level.