Zoom was hailed as the stock of the year last year, but after reporting Q2 earnings its share price is now falling, what’s going on?
Aug. 31, 2021
Looking at the big numbers, it looked like Zoom (NASDAQ: ZM) had a great three months. Notching its first billion-dollar quarter for sales, boosting guidance for the rest of the year, and an expanding product line that is performing well — why on earth is Zoom stock down?
While it may have met analysts’ estimates, investors focused on the fact that the video conferencing company’s growth is slowing down when compared to previous quarters. This theme has been very common with tech companies this earnings season as many expect the hyper-growth that they experienced during the pandemic to eventually die down this year when the economy fully (hopefully) reopens.
Shareholders might have been a bit too harsh on Zoom yesterday as we could have guessed the firm could not keep up with the explosive growth it witnessed in 2020.
How were Zoom’s second-quarter earnings?
Let’s look at some of the numbers. For the second quarter, Zoom reported:
- Adjusted earnings of $1.36 per share, beating analysts’ estimates and up from $0.92 in the year-ago period.
- Revenue of $1.02 billion, topping Wall Street’s expectations and up 54% year-over-year (YoY).
- Gross margin increased to 74.4% from 72.3% in Q1.
- Number of clients contributing more than $100,000 in sales grew 131% YoY.
For the full fiscal year, Zoom also boosted its guidance for earnings to between $4.75 to $4.79 per share on revenues of up to $4.015 billion. This marked a significant leap from its previous estimates of earnings of between $4.56 to $4.61 on sales of up to $3.99 billion.
Increasing COVID-19 cases encouraged Zoom to boost its guidance for the full year as the probability of further lockdowns is good news for the remote working tool. However, Zoom executives have noted that travel is returning back to normal faster than they had expected which might mean slowing growth if employees go back to physical meetings.
In better news, the video conferencing leader spoke of the successes of its new product line on the call. In Q2, Zoom launched Zoom Events, which gives companies the option of holding premium online meetings. In addition, the firm now has 2 million seats for its Zoom Phone cloud-based phone service, up from 1.5 million in Q1.
Why is Zoom’s stock price down?
The main reason the stock fell 12% in late trading last night is that shareholders focused on Zoom’s slowing growth quarter-to-quarter. So while it posted revenue growth of 54% for Q2, investors looked in the rearview mirror and remembered when Zoom reported a sales jump of 191% in Q1. What made matters worse is that for the next quarter, the tech firm is guiding for only 31% growth.
Investors are concerned that Zoom’s share price might fall again if it consistently keeps reporting slower revenue growth. If we take a step back to take in the wider picture, it’s not surprising that Zoom’s sales are dulling, considering the hyper-growth it experienced during the pandemic when almost the entirety of western civilization turned to video conferencing services to stay in contact.
Is Zoom stock still a buy after Q2 earnings?
Zoom is still a great long-term investment opportunity, evidenced by its product expansion, growing market share, and thriving customer satisfaction. The fact that the relatively new company was able to obliterate old players like Skype and was favored over Big Tech giant Microsoft’s Teams, proves that this is a formidable business with plenty of potential still ahead.
Given that cases are rising and most workforces are begging for remote work, or at least a hybrid working model, Zoom is unlikely to be going anywhere soon. This short-term panic selling is normal when a thriving business reports slowing growth all of a sudden, but it doesn’t take away from its long-term potential.
Zoom is a top-performing stock, but there are plenty of other solid investment opportunities in our market-beating shortlist. Access analysts’ insights, expert content, and much more by starting your MyWallSt free access now.