Video conferencing startup Zoom (NASDAQ:ZM) reported results that again crushed expectations.

The company generated $663 million of revenue, beating/missing consensus of $500 million by 33%.

Revenue growth of 355% year over year accelerated from last quarter’s already stellar growth of 169% and was higher than the market’s expectation of 243% growth for the quarter.

Earnings of $0.92/sh exceeded consensus of $0.45/sh by 100%.


Management also increased revenue guidance for the rest of 2020 another 33% after already doubling estimates last quarter, a positive sign for further momentum.

Zoom has clearly been the #1 beneficiary of the new pandemic world we are living in.

The stock is up 6% in after-hours trading and will likely go higher as investors digest the incredibly solid results.

Zoom’s stock price has gone absolutely wild this year driven by the Coronavirus narrative.

With new expectations set, the company will need to keep putting up better and better user growth to keep the stock running after a ~400% increase in the last year and one of the highest multiples in all of software. 

We believe in Zoom’s potential over the long term and will be buying aggressively if the stock falls due to missed growth expectations in the coming quarters. If the stock approached $400/sh in the next few months without rising revenue estimates to match, we will turn cautious until the multiple falls at least 10%.

Software Stock Performance YTD

Source: http://www.ycharts.com

On the profitability front, Zoom generated $373 million of free cashflow, a massive jump from $26 million two quarters ago though it still is only a 2% free cash flow yield, worse than many dead oil company’s, but in-line with bond rates.

Zoom is signing up new customers at a rapid rate, but with one of the highest sales multiples in all of tech and a stock that has run 400% this year one small hiccup to growth or profits and this stock will give up months of gains.

With a fundamental cashflow yield of less than 2%, Zoom’s stock price is not supported by the earnings of the business.

The stock is trading on expectations of great growth for years to come so expect continued volatility.

Watch growth closely, if Zoom can’t keep growth above 25% quarter after quarter, the market will punish both the multiple and the stock price looking forward.

2020 Price to Sales Multiples for the High-Growth SaaS Group

http://www.ycharts.com

Zoom is solidly profitable unlike other money-losing tech stocks, which makes it a bargain if it can maintain growth at least in line with other expensive but money-losing peers.

Revenue and customer growth remain the two most important metrics driving this stock and they have been stellar.

Be Cautious on Zoom Above $400, Buy Hand Over Fist Below $150

As market and stock sentiment changes, stocks waver between cheap and expensive all the time.

Because of this volatility, we recommend looking at stock prices through the lens of a buy-and-sell point, not just one fundamental value.

In the case of Zoom, we have defined potential buy and sell points based on the most expensive and average multiple in the cloud services industry, which equates to $400 and $150 for the stock.

At $400/sh Zoom is already pricing in a 50x multiple on 2021 revenue estimates, an aggressive outlook.

Maintaining such a high multiple will be hard to do in our opinion unless growth continues to exceed estimates.

Over the long term, however, Zoom still has upside with a massive global market to tap into and a brand that has benefitted greatly from the pandemic with lasting positive results.

On the flip side, if the stock runs into growth difficulties for a few quarters and falls anywhere near $150 we would be buying hand over fist as the long term potential for Zoom is very attractive.

*Insert your own price target into the Grizzle Buy/Sell tool to generate a unique buy/sell point. Our target of $400 is explained above*

Buy and Sell Points for Zoom Stock

As long as the current market sentiment of growth at any cost is sustained, fast-growth stocks like Zoom will work even if they trade at eye-watering valuations.

Zoom can easily keep going higher if it keeps growing faster than analysts are expecting, but at the current valuation, the stock will fall fast and hard if it puts up even one-quarter of less than expected revenue.

When multiples are expensive you need to be ready for lots of stock price movement around earnings.

Zoom Price to Sales now at 50x Doubling from 24x in Early 2020.

Http://www.ycharts.com

 

Disclosure: The author owns shares in Zoom

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.