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Zoom Video Communications (NASDAQ: ZM) has been one of the success stories of 2020. The COVID-19 pandemic accelerated the trend towards work from home as businesses were shut, increasing the demand for collaboration tools.
Zoom stock gained a staggering 765% between January and mid-October before falling by 30%. Despite the recent weakness, shares are still up over 500% year-to-date. Comparatively, the S&P 500 Index has gained 14% in 2020.
So, should you buy Zoom stock right now?
Zoom sales were up 367% in fiscal Q3 of 2021
Zoom recently reported its fiscal third quarter of 2021 results ended in October. The company’s sales were up 367% year-over-year at $777 million while net income soared to $198 million or $0.99 per share, up from a paltry $2 million in the prior-year period.
Analysts expected the company to report sales of $694 million and earnings of $0.76. During the earnings call, Zoom CEO Eric Yuan said, “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.”
In fiscal 2021, the company expects sales to rise 314% year-over-year to $2.58 billion and it has forecast Q4 sales between $806 million and $811 million, above consensus estimates of $730 million. Zoom claimed its outlook has taken the demand for remote work solutions into consideration and also accounts for increased churn in Q4 driven by a higher percentage of users who have purchased a monthly subscription.
In Q3 it added 433,700 customers with an employee base of over 10, up 485% year-over-year. Further, 1,289 customers contributed $100,000 in the last 12-months, a growth of 136% year-over-year.
Zoom stock is still expensive
Zoom is valued at a market cap of $117.4 billion which means its trading at a forward price to earnings multiple of 45.6x and a price to earnings multiple of 146x. However, investors should also note that revenue and adjusted earnings soared by 367% and 1,079% respectively in Q3.
Does this mean Zoom stock is trading at a discount compared to its growth rate? In fiscal 2022, Wall Street expects sales growth to normalize to 38.5% to $3.54 billion while earnings might rise by just 4%. However, Zoom has crushed market expectations in the last four quarters and might continue to do so in the future as well.
The verdict
Zoom’s net dollar expansion rate in the last 12-months is a healthy 130% and the company continues to benefit from secular tailwinds. Its operating cash flow soared 565% to $411.5 million while free cash flow stood at $388.2 million, up 610%.
We can see Zoom Video has high operating leverage and an increase in sales results in a massive expansion of its bottom-line. Analysts tracing Zoom stock have a 12-month average trading price of $486 which is 18% above the current trading price.
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