Zoom Video Stock Gives Back Gains. Here Is What’s Worrying Investors.

Zoom shares rallied as much as 10% in after hours trading Monday, and opened sharply higher on Tuesday. The gains, however, have faded despite generally upbeat Street commentary. The stock, which traded as high as $440 earlier in Tuesday’s session, was down 7.4% to $379.22 in recent trading.

The decline is likely for two reasons. One, Zoom’s astonishing string of triple-digit-growth quarters seems to be nearing an end, as it now faces Covid-inflated year-over-year comparisons. And two, even after falling back from previous highs, the stock continues to trade at lofty multiples of sales and earnings.

J.P. Morgan analyst Sterling Auty on Tuesday repeated his Neutral rating on Zoom stock, inching up his price target to $456 from $450, but cautions in his post-earning research note that this could be “the last hurrah” in the company’s fantastic Covid-driven run.

“The April quarter begins the ramp into tougher compares and that will have investors continuing to discuss what the appropriate post-pandemic growth rate for Zoom will look like at this scale,” he writes. “There is still a tremendous amount of growth opportunity in the market in both international and the Zoom Phone segments, but the question will be the rate and pace of adoption post-pandemic.”

Zoom is projecting revenue of $900 million to $905 million for the April quarter, with non-GAAP profits of 95 to 97 cents a share. The Street had been projecting revenue of $804.8 million and non-GAAP profits of 72 cents a share.

Auty also sees risk in the fact that accounts under 10 employees made up 37% of revenue. “We believe that this customer base could pose a higher risk to churn rates going forward given that it is the most likely to be impacted if a vaccine becomes widely available,” he writes. 

Citi’s Tyler Radke picked up coverage of the stock Tuesday with a Neutral rating and $501 target price. “While annual guidance was ahead of expectations …we worry the significant deceleration in growth throughout the year could weigh on the stock, especially with new product growth drivers still too small to move the needle,” he writes in a research note.

For the January 2022 fiscal year, Zoom expects revenue of $3.76 billion to $3.78 billion, up 42% from the previous year at the midpoint of the range, with non-GAAP earnings of $3.59 to $3.65 a share. The Street previously had been projecting fiscal year January 2022 revenue of $3.52 billion with non-GAAP profits of $2.96 a share.

Radke’s interpretation of the guidance for the year is that growth will descend from about 175% in the April quarter to the low teens in the second half amid very difficult comparisons.

Piper Sandler analyst James Fish, on the other hand, responded to the earnings report by upping his rating to Overweight from Neutral, with a new price target of $541, up from $501. “Previously, valuation and the high exposure to commercial monthly-paying customers kept us on the sidelines,” he writes in a research note. “While the quarter itself did not answer the latter concern, the lead metrics suggest greater exposure to enterprise and annual/ multi-year customers ahead with a more digestible valuation given visibility.”

Oppenheimer analyst Ittai Kidron liked the quarter, and he sees opportunities for the company to expand its reach into new areas. “Zoom continues to show how critical it is in a digital world; we believe its relevance will remain high post-Covid-19,” he writes. But the stock’s valuation—25 times his estimate for 2022 sales—gives him pause, and he maintains his Perform rating.

Write to Eric J. Savitz at [email protected]