Zoom’s Reports Earnings… Queue the Mic Drop

You know you’ve succeeded when your company name is used in place of a verb. Zoom ($ZM), the video conferencing tool, reported their quarterly earnings on Aug. 31 and exceeded all expectations.

• Revenue increased 355% from last year to $663.5m, 33% above market consensus.
• Net income increased over 13x from last year to $277m.
• International sales outside the Americas increased the fastest, over 7x from last year.

How did Zoom get here? The company had been a major beneficiary due to COVID but here’s a couple things that helped Zoom become our go-to video chat service:

• Strong brand awareness… The company isn’t afraid to splurge to build their brand. During COVID, Zoom tripled their ad spend in the first quarter of 2020, while many other companies reduced their marketing budgets.
• The company’s product markets itself… Even if you’ve never heard of Zoom, you become aware of their product once you join a Zoom call. It also helps that it’s free for everyone to use.

Where does Zoom go from here? Even though the company’s stock is up nearly 400% this year, Zoom has a couple more tricks up its sleeve:

• Work from home boost… More and more companies are opting to shift their workforce to work from home permanently. To further capitalize on this trend, on July 7, Zoom launched a hardware offering to sell and rent video conferencing equipment.
• Growth beyond the US…. Sales in the Americas made up 68.4% of Zoom’s total sales and it already holds 42.8% of the US video conferencing market. International sales will be an important source of growth for Zoom.

For investors, the number one concern with Zoom is that the company is overpriced. According to NYU Stern School of Business, the average price-to-sales multiple of a US software business is 6-9x. This multiple is a commonly used metric to gage whether a company is under or overpriced. The higher this number is, the more overpriced a stock becomes.

Investors have argued that Zoom is overpriced as it trades at a ~44x price-sales-multiple. Companies that are growing at a faster pace usually trade at a higher multiple. However, 44x seems a little high even compared to high rolling Tesla which trades at ~17x. Zoom will have to maintain a high growth rate to justify its high valuation, otherwise, its stock could fall.