Zoom Video Communications, Inc. (NASDAQ:ZM) just released the latest quarterly report, and some analysts have been promoting this as a validation of the business model of zoom. Today we will take a look at the performance of Zoom and check what this may mean for the value of the stock.
Quarterly Highlights
Q1 Revenue reached US$1.074b, largely in-line with analysts' expectations of US$1.07b
This puts the last 12 months revenue at US$4.217b as quarterly revenue grew 12%
Adjusted EPS was US$1.03 vs US$0.87 expected
Non-Gaap operating income was US$400m, about the same as a year ago
Net Cash from operations was US$526.2m vs US$533.3 in the prior year
In order to better understand what is happening with the business, we can look at key customer metrics.
Zoom finished the first quarter with about 200k enterprise customers, up some 24% from a year ago. The company had 2.916 customers contributing more than US$100k in revenue for the last 12 months.
This shows that the company has a diversified customer base and is not relying on a few major customers to deliver revenues.
Considering the outlook, the company estimates a decline in non-Gaap operating income for the second quarter of about 9.3%, to an estimated US$362.5m Q2 operating income.
For the full year, revenue is expected to come around US$4.54b, a projected increase of 10.7% from 2021.
It is clear that the company is losing the 2021 tailwind, and now has to focus on retaining customers in a different landscape, as well as attracting new customers.
In order to get a better sense of what this means for investors, we can pair the results with what our DCF valuation model.
Value Estimate
Our 2-stage discounted cash flow model yielded an intrinsic value of the company of US$46b or US$155 per share. Relative to the last close price, the stock is trading at an estimated 42% discount.
Zoom already has positive free cash flows, giving us the following valuation results:
Present Value of 10-year Cash Flow (PVCF) = US$13b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$60b÷ (1 + 6.2%)10= US$33b
NasdaqGS:ZM Discounted Cash Flow May 23rd 2022
Risk Factors
It seems that the company is significantly undervalued, even accounting for a 20% margin of error. Investors should also ask themselves what may be keeping the price down. In order to address this, we need to discuss some risk factors.
The first and most important risk factor is the current competition, with Microsoft Teams being the obvious example. It may be hard for Zoom to retain customers who are using Microsoft 365, since their Teams tools fits easily in the ecosystem. Zoom will need to build up significant advantages in order to convince customers to switch. Microsoft is currently holding a large portion of enterprise customers, and it will be hard for Zoom to take away that share based solely on price competition.
The second competitor is Google Meet, which is a relatively cheap and fast alternative to both teams and zoom. Meet caters mostly to individuals and small businesses that have a Gmail account or utilize the G-suite app family in their lives. The benefit of meet, is that it is quite easy to launch, but lacks some advanced features.
Another risk factor is future innovation. CRM companies, large enterprises, and even small developers are constantly constructing their own video conferencing tools that may bring down the profit margins of Zoom and/or take portions of their market share. Zoom may address this by catering to and being a market leader in a specific customer segment, but this has yet to be established.
As we can see, the company has some risk factors, which may explain why investors are still not at ease with investing in the business.
Conclusion & Looking Ahead:
Zoom managed to perform largely in-line with expectations, which may bring a sigh of relief to investors who expected lower results. The company seems to be undervalued on an intrinsic basis, but investors are not yet convinced that they can account for a significant portion of the risks.
Non-Gaap operating earnings are expected to slightly decline in the future, and management has to provide a strong path to growth and profitability in order to keep the interest of investors.
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