Shares of Zoom Video (ZM 0.47%) popped 10% this week, according to data from S&P Global Market Intelligence. The video-meeting software provider posted earnings and revenue growth that exceeded expectations in the fourth quarter. The pandemic winner is still off 87.5% from all-time highs but is improving its business fundamentals.
Here’s why Zoom stock rocketed higher this week.
Beating revenue and earnings expectations
In the fourth quarter of last fiscal year, Zoom posted revenue of $1.15 billion and adjusted earnings per share (EPS) of $1.22. Both numbers were slightly above analyst expectations of $1.13 billion in revenue and $1.15 in adjusted EPS. A double beat is an easy recipe for a post-earnings stock pop, which is why Zoom Video was up this week.
Looking deeper into the report, Zoom had somewhat strong financials this quarter. Its remaining performance obligations — an indicator of future revenue growth — grew 4% year over year to $3.56 billion. While not hypergrowth, this shows that business customers are still using Zoom’s products several years after the pandemic lockdowns. Enterprise revenue was up 5% in the quarter, while monthly churn declined from 3.4% a year ago to 3% last quarter. All positive signs for Zoom’s business momentum.
For this fiscal year, Zoom is guiding for $4.6 billion in revenue and just under $1.5 billion in free cash flow. It also just authorized a $1.5 billion share repurchase program, which will return its hefty cash pile to its investors.
What will this fiscal year look like?
Zoom likes to tout its free-cash-flow generation. It is expecting $1.48 billion at the high end of its guidance for fiscal year 2025 (the current fiscal year). But this doesn’t include the $1.1 billion it spends each year on stock-based compensation, which is a real expense. Using generally accepted accounting principles (GAAP) earnings, Zoom has a trailing price-to-earnings (P/E) ratio of 35.
Earnings ratios above the market average are typically reserved for the fastest-growing companies. Zoom is barely growing its revenue. Despite its big claims of cash-flow generation, Zoom stock looks overvalued at these levels unless you think it can reaccelerate revenue growth. Investors would be smart to avoid buying shares at the moment, even with the stock off close to 90% from all-time highs.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.
