Zoom Well-Positioned to Thrive in Post-Pandemic Era

·4 min read

Zoom Video Communications, Inc. (ZM), the video conferencing company that shot to fame early last year as a result of mobility restrictions, reported significant earnings for the April quarter, beating analyst estimates for both revenue and earnings.

The reported earnings per share of $1.32 was substantially higher than the expected EPS of 98 cents, and the revenue of $956.24 million for the quarter was a year-over-year increase of 191%. (See Zoom stock analysis on TipRanks)

Though this financial performance confirms that ZM is building on last year’s momentum, the stock has declined a staggering 40% since last October. The vaccination program’s success has pushed investors to focus on companies that would benefit from the eventual reopening of the economy. That was one of the primary reasons for the lackluster stock market performance of ZM in the last eight months.

Promising Macroeconomic Outlook

The global videoconferencing market grew exponentially in 2020 as a result of mobility restrictions that forced companies in every region of the world to rely on video conferencing platforms to seamlessly conduct business operations. Distance learning also gained traction due to the global lockdown, and ZM became the leading facilitator of this remote working and learning environment.

The global vaccination drive and the reopening of the economy, which are already gathering pace, are likely to lead to a decline in the number of video conferencing platform users in 2021. According to data from The Business Research Company, industry revenue will drop to $6.03 billion in 2021 from $7.87 billion in 2020, a decline of 23.35%. Although this is not good news, the long-term outlook remains positive.

For one, 5G technology is expected to be available widely within the next couple of years, and this important transition from 4G will aid the growth of data-oriented concepts such as the Internet of Things, which will aid a secular growth of the remote working concept. ZM has established itself as the go-to video conferencing platform among many large-scale organizations and is well-positioned to be a winner of this developing trend.

The growing popularity of freelancing will also be a catalyst for growth. Statista projects freelancers to account for 51% of the total workforce in the U.S. by 2027, and pandemic-related challenges in 2020 have already accelerated the pace at which highly-qualified professionals are becoming part of the gig economy.

A survey conducted by Payoneer found that India is the second-fastest growing freelancing market in the world, which is a sign that emerging nations are also embracing the gig economy. The growth in freelancing will result in an increase in the demand for video communication platforms, boding well for ZM.

ZM is Moving in the Right Direction

The company is actively pursuing expansion opportunities, and two interesting developments stand out. First, the Zoom Phone that was launched in 2019 is gaining traction globally, which is an encouraging sign as this opens up a new stream of revenue for ZM.

Earlier this year, the company achieved a major milestone by gaining 1 million active Zoom Phone licenses around the world. Zoom Phone is available in 44 countries, and the company is encouraging many small- and large-scale businesses to ditch their traditional telephone systems and adopt Zoom Phone seats that provide seamless access to standard calls (both local and international), combined with a one-click access to Zoom video meetings with the same device.

Secondly, ZM is tapping the lucrative opportunity available in fast-growing international markets. For the three months ended on April 30, the Americas region revenue grew 159% year-over-year, while international revenue grew at a faster rate of 288%. The international segment accounted for 33.5% of the total revenue in the quarter, which is a notable improvement from just 25.1% in the corresponding quarter of the previous year.

The expected IT industry growth in populous nations such as India, Thailand, Malaysia, and Brazil will present many growth opportunities for ZM ahead. As the leading videoconferencing platform in many of these regions, the company appears well-positioned to grow.

Wall Street’s Take

The average analyst ZM price target is $405.63, which implies an upside of 21.58% from the current market price. For the majority period of the last 12 months, the company’s stock traded well above the high-end price target of $495, and it would be reasonable to expect the stock to trade above this price target in the long run.

Takeaway

ZM’s stock declined sharply in the last eight months, but its financial performance has continued to improve, which has created a discrepancy between the economic reality facing the company and its market value. ZM is likely to grow in double digits even in the recovery phase of the business cycle, and it is attractively priced now.

Disclosure: Dilantha De Silva did not own any shares mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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