Zoom stock dives following downbeat Q2 results, Five9 deal roadblocks

Zoom adds 46m downloads in September, stock soars by over 600% YTD

Zoom stock is diving in pre-market stock trading action this morning following the release of the company’s financial results covering the second quarter of its 2022 fiscal year as the video conferencing giant failed to dazzle Wall Street analysts.

Revenues of the California-based software company landed at $1.02 billion resulting in a 54% jump compared to the same period a year ago and effectively exceeding analysts’ estimates for the period as compiled by Capital IQ by nearly 3%. This was the first $1 billion quarter for the video conferencing app in its history.

According to the company, the number of customers who paid over $100,000 for using the video conferencing software in the past twelve months jumped 131% compared to the same period a year ago to 2,278 while the number of businesses with over 10 employees that signed up with Zoom (ZM) experienced a 36% increase to 504,900 customers.

Meanwhile, the firm’s non-GAAP operating income – which adds back non-cash items – landed at $424.7 million for the period resulting in a 53.3% jump compared to the second quarter of 2020 while its non-GAAP operating margin landed at 41.6% resulting in a 10 basis points drop compared to the previous year.

Finally, the company reported adjusted non-GAAP net income of $415.1 million along with adjusted diluted earnings per share of $1.36 resulting in a 51% and 47.8% advance in the two figures respectively compared to a year ago. This bottom-line adjusted profitability beat analysts’ estimates of $1.16 for the period as compiled by Capital IQ.

Moreover, Zoom shared its guidance for the upcoming third quarter of 2021, with sales and adjusted EPS expected to land at $1.02 billion and $1.09 per share respectively – in line with the Street’s estimates.

Meanwhile, for the 2022 full fiscal year, the company is forecasting total revenues of $4 billion and adjusted earnings per share of $4.61 – also in line with analysts’ forecasts.

Why are Zoom shares dropping?

Zoom shares are sliding 11.7% in pre-market action this morning at $347.5, which would result in a 9% year-to-date loss for the issue if this downturn materializes during the live session.

Even though Zoom’s quarterly report wasn’t necessarily bad, Wall Street is accustomed to seeing revenue and earnings surprises from Zoom as reflected by its track record. The fact that the business met the Street’s forecasts means that the pandemic tailwind might already be fading for the video conferencing app and that may result in slower growth down the line for Zoom.

Moreover, the Federal Communications Commission (FCC) has stated that it plans to take its time to review Zoom’s latest acquisition of the cloud-based call center software company Five9 even though the company had applied for “streamlined” processing of the deal.

In this regard, the agency stated yesterday: “the application requires further analysis to determine whether a proposed transfer of control would serve the public interest”.

This would suppose a delay in Zoom’s timetable to incorporate Five9 services to its platform and it might be one of the factors prompting this morning’s pronounced downtick.

What’s next for Zoom stock?

Today’s drop in Zoom stock would effectively break the price channel highlighted in the chart above within which the price action had remained confined for around a month and a half ahead of this earnings report.

This break may result in the beginning of a new downtrend for Zoom similar to the one that started back in October 2020 following the progressive rollout of COVID vaccines across the world.

Even though the stock price managed to break that downtrend recently on the back of a prolonged contingency amid the rise of the Delta variant, these latest quarterly results highlight that the firm’s future growth may decelerate moving forward as the world progressively gets back to normal.

More companies are now calling back workers to the office while executives and sales representatives are jumping back on planes and that is not good news for Zoom in the long term.

Analysts’ forecasts for the company for its 2023 fiscal year highlight this situation as revenues for the year are expected to grow at an average rate of 20% while non-GAAP EPS are expected to advance by the low single-digits over the next two years or so.

Based on Zoom’s forecasted adjusted EPS for this 2022 fiscal year ($4.8 per share), the company is being valued at 63 times that figure. Meanwhile, the price-to-sales ratio for the firm stands at around 26 while its price-to-adjusted-free-cash-flow metric is standing at around 46 for the year.

Upon considering the possibility that Zoom’s growth may start to slow down significantly from this point forward, its valuation at the moment seems fairly stretched and that might result in an upcoming pronounced downtrend in the stock price as the market may correct its course to reflect this U-turn.

Moving forward, the outlook for Zoom stock is bearish with the low 200s possibly serving as the next area of support for the stock resulting in a 35% to 40% downside risk based on yesterday’s closing price