Zoom Video Communications Inc.

Weekly Valuation – Valutico | 26 August 2022

Link to the detailed valuation: here

Zoom (ZM:NASDAQ) reported earnings per share of $1.05 in the second quarter of its 2023 financial year, exceeding analyst expectations by 12%. It also increased revenue by 8% compared to the same quarter last year, however this did miss analyst expectations slightly.

Originally developed for enterprise use, Zoom suddenly became a very popular retail product during the onset of the Coronavirus pandemic. Its share price rocketed from roughly $70/share at the start of 2020 to a peak of $559/share in October 2020. As Coronavirus restrictions started to lift globally, Zoom’s share price gave back almost all of those gains and is currently trading at $85/share.

Notwithstanding the volatility of its share price, Zoom has achieved eye-watering growth over the past two years, with annual revenue increasing from $622 million in 2020 to $4.1 billion in 2022 and net income growing from $25 million in 2020 to $1.4 billion in 2022.

Zoom is now focusing on large corporate clients and, among other things, the call center business to lay the foundation for new growth. The strategy also includes using its strong position in video conferencing to offer voice telephony to corporate customers. In this area – Zoom Phone – the past quarter was the best so far. In the online business, which Zoom does mainly with consumers and small businesses, a decline of 7 – 8 % is now expected for the current financial year causing it to lower its revenue guidance from $4.5 billion to $4.4 billion. 

The slight downward guidance made investors nervous and the share price declined by as much as 11% in pre-market, after the results were announced. The stock is down roughly 20% for the month of August.

Valutico analysis

Zoom’s current market cap is $24 billion. Our DCF WACC analysis (WACC = 7.3%) produces a valuation of $29 billion. Applying the observed trading multiples of other large players in the online video conferencing space, such as Alphabet (Google Meet), Cisco (Webex) and Microsoft (Teams, Skype), to Zoom’s current and expected results produces a valuation range of $21 – 30 billion. 

Our conclusion is thus that, at current levels, Zoom is perhaps slightly undervalued.

Link to the detailed valuation: here