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Zoom Video: Earnings Were Good, but Be Wary of Soaring Valuations

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Jun. 10 2019, Published 8:30 a.m. ET

Zoom Video

Zoom Video Communications (ZM) released its fiscal 2020 first-quarter earnings results on June 7. The company’s earnings were better than expected on both the top and bottom line fronts. Its net loss also narrowed in the quarter. The company’s revenue guidance was also higher than analysts’ estimates.

Its operating metrics looked strong as well, and the quarter was its best ever in terms of new customer additions.

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Overall, Zoom Video’s earnings exceeded estimates on several metrics. The market also reacted positively to its earnings, and the stock soared more than 18% on June 7. Several Wall Street analysts also raised their target prices on the stock. Credit Suisse raised Zoom Video’s target price from $80 to $90, while RBC Capital Markets raised it from $80 to $86. Rosenblatt also raised Zoom Video’s target price from $60 to $80. However, it’s worth noting that Zoom’s current market price is above the new target prices these brokerages have set. The stock is trading 13% above its mean consensus price target.

Growth

While Zoom Technologies has reported strong revenue growth, we need to be mindful of its valuation multiples. The stock is trading at an enterprise value-to-revenue multiple of 35x its fiscal 2020 revenue and 27x its fiscal 2021 revenue—pretty high valuation multiples even considering its growth prospects. Its PE multiple of 1,345x based on its fiscal 2021 consensus estimates is also quite high.

While hyped IPOs such as Uber’s (UBER) and Lyft’s (LYFT) haven’t really impressed with their price actions, Zoom Video and Beyond Meat have created investor wealth since their IPOs. However, given these companies’ high valuations, investors need to be wary despite their strong growth prospects.

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