Zoom Video Communications was one of the clear winners of the pandemic economy. But as more people return to the office and classroom, the company now faces a bigger challenge: living up to Wall Street’s hype.
Shares of Zoom plunged more than 15% Tuesday morning and are now in the red for the year after the company reported results for its fiscal second quarter after the close on Monday.
The numbers were good. Earnings easily beat forecasts. So did revenue, as sales topped $1 billion in a quarter for the first time. What’s the problem then? Sales growth is cooling. And investors have high expectations for Zoom after the stock soared an astonishing 400% in 2020.
Zoom reported that revenue was up 54% from a year ago in the quarter. But that’s down sharply from the 355% growth in sales Zoom reported this time last year during the height of Covid-19 fears. Sales were up 191% in Zoom’s previous quarter, too.
The slowdown is expected to continue. Zoom said sales in the third quarter are expected to rise about 31%.
Of course, Zoom is still doing extremely well. Most large companies (Zoom’s market value is now near $100 billion) would love to post sales growth rates north of 30%.
The company is also doing a good job of continuing to add larger so-called enterprise customers…big firms that spend more than $1 million a year with Zoom.
Zoom CEO Eric Yuan even joked on the company’s conference call with analysts Monday that he’s thrilled to hear that Charlie Munger, the 97-year-old vice chairman of Berkshire Hathaway, is a “happy user.”
“I have been humbled by the stories of how finance professionals have leveraged Zoom to reimagine the way they work. Specifically, I’d like to thank Charlie Munger of Berkshire Hathaway for his remarks about how Zoom has added so much convenience to his life,” Yuan said. “And I nominate myself to be Charlie’s personal Zoom tech support if he ever needs it.”
More and more competition
But Zoom faces growing competition in the online video meetings business. Microsoft has launched Teams to go along with Skype. Cisco owns WebEx and Jabber. Alphabet’s Google Workspace includes Meet, Chat and other collaboration tools.
Zoom Chief Financial Officer Kelly Steckelberg said during the conference call that the company now has to adjust as smaller businesses and consumers, who tend to purchase cheaper subscriptions online, are adapting “to the evolving environment.”
She added that this business segment will be a “headwind in the coming quarters.”
Zoom seems to realize that it’s going to need to diversify to stay competitive. it can’t put all its proverbial eggs into a video conferencing basket. That’s why the company announced last month that it was buying Five9, a cloud-based customer service center software firm, for $14.7 billion.
Analysts also think investors are still trying to figure out what’s next for Zoom.
The Mizuho Americas research team said in a report that the company’s outlook “assumes increased churn in small businesses” and that the stock could be stuck in a range “as investors reassess Zoom’s normalized growth trajectory.”
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