Yahoo Finance's Brian Sozzi and Myles Udland break down Zoom's latest earnings report, and outlook for the company.
Video Transcript
MYLES UDLAND: But let's begin our conversation this hour by looking at Zoom. The company as we saw there in the premarket is down some 14% following its most recent quarterly report. Let's get to the headline numbers here on where things shook out for Zoom on the top and the bottom line in its most recent quarter, which we should note is the second quarter of its fiscal 2022, we've had that conversation here before.
Revenue $1.02 billion, adjusted earnings per share $1.36, both coming in better than expected. But Brian Sozzi, this is all about the guidance and really about some commentary you flagged from TheStreet, but what is Zoom?
Is it the kind of rapid grower that TheStreet priced in and that was rewarded, shareholder rewarded that, over the last 18 months or is this company in a different phase where growth is more modest and guiding to a 15% year over year growth rate in the fourth quarter of its fiscal 2022? Quite a change from what we've or what TheStreet is at least grown comfortable with for the company.
BRIAN SOZZI: Yeah, it's worth breaking it down and helping investors I think understand when a company-- Zoom puts up sales growth, on the surface looks very strong. Sales up 54%, gross profit margins up, operating margins, they looked OK. When it comes to a high growth stock like a Zoom, it's being valued or looked at as that growth can continue seemingly for the next decade or 20 years, and that is not happened here.
And I'm going to zero in on the quarter over quarter growth rates for some key lines of business for Zoom. So for customers that spend more than $100,000 on the platform, that revenue growth rate rose 131% in the second quarter. In the first quarter of this year, that growth rate was 160% so that slowed down, TheStreet does not like that.
Also what they don't like, a large part of Zoom's business is in fact, and we've talked about this a lot, small business customers. And on that end, those customers with more than 10 employees, that sales growth rate was 36%, in the first quarter it was 67%.
And Zoom didn't hide the fact they are seeing a slowdown in their business, and they captured that slowdown, I think not only with their third quarter guidance but their overall guidance for the year, which suggests a further slowdown into the fourth quarter.
Zoom CFO Kelly Steckelberg noting on the call, we have really seen a slowdown in their online business or the core Zoom platform as more people go out there and become more mobile. And as a result of this slowdown in sales, in profit growth, you're seeing TheStreet come out here and absolutely eviscerate the company, and really come out hard.
A lot of sell side firms this morning have cut their ratings, cut their price target, excuse me, on Zoom shares. And really one of the most aggressive names is Tyler Radke over at Citi, voicing the print or the earnings result was quote, "Disappointing given the slowdown in new customer acquisition Zoom Phone and room products," again, those ancillary lines of business for Zoom, doing OK but not as well as he would have liked.
And to your point Myles as well, noting this. He says he's wary of a potential demotion for Zoom from hypergrowth to growth at a reasonable price, and I think that's why we're seeing a rerating in the shares here. And then like we mentioned this yesterday Myles, I mean, the stock is down 12% into this earnings report so to see it down another about 15% in the premarket, I mean, this is big stuff for Zoom. Very disappointing.
MYLES UDLAND: Yes, certainly. And you see here, the year to date chart, those gains are going to be going away as we get through the opening bell here, up through yesterday's closed, 3% so far this year.
So the company at yesterday's close had a market cap about $100 billion and now we're taking that down to, let's call it 80, 85 depending on where exactly we shake out, exactly how you want to do the math on diluted shares and there can be obviously conversations around that.
So let's call it $80 billion since their revenue run rate, Sozzi, is $4 billion on annual basis. So it's still trading at 20 times sales and 20 times sales is still pretty great. Now they are making money so you can spin it the other way, you could say, well at $3 per share they're trading at 60 or, let's say what would be the math on that, 30 times earnings, something along those lines. I think my math from maybe it's-- I don't know.
Anyway, we're all crossed up here. Well, hold on, hold on. So $300 a share $3, yeah, so 100 times earnings or 20 times sales because, again, $3 per share, $300 per share, 100 times, so there you go. So still expensive either way you cut it.
And you can do this as a growth story, which is going to be more typically valued off a revenue multiple, you can do it as sort of a growth at a reasonable price, a GARP, at the Tom Lee GARP construction, that's probably going to be more off of the actual earnings. Both metrics have the company as an expensive stock today.
And I know there's this-- it's this very obvious everything was pulled forward and now the stock is getting rerated. On the one hand you'd say could investors not have figured this out? Like what were people buying at $560 a share?
Did they really think it was going to be multiple years of 400% growth? I think even at the time it seemed like the obvious answer was no but where does the stock find a floor? Where does the story, you say the stock is rerating this morning, where does the story find a new beginning? Because I still think we're benchmarking off of a valuation that was almost 2x where the stock is today.
BRIAN SOZZI: Myles, you're giving away all this Yahoo Finance Plus level data for free man, we've got to keep this stuff behind the paywall but, no, I think you're right on.
MYLES UDLAND: This is the free stuff and it took me a minute to do the math so that's why it's free.
BRIAN SOZZI: I think part of the reason here is you're seeing the stock really slaughter here. TheStreet is trying to figure out what is the steady state growth rate for Zoom in 2022, in 2023, in 2024 and even 2025. What does this company look like in a world where more people are working in the office but by the same token, they may spend two days and work from their home.
Now, and I think this is perfectly captured in another note out of the folks at Piper Sandler. They're saying, they anticipate some near-term pressure on shares, that's an understatement, but view this as a buying opportunity as secular drivers are intact and enterprise remains strong.
Those secular drivers are in fact, still in place for Zoom, again, a hybrid work, people working from home. It's just how fast is that business growing in a world where we are hybrid working. And in TheStreet, they don't quite understand how to measure that just yet.
MYLES UDLAND: Yeah. And there's a part of this conversation on the call, the area that analysts seem excited about, which we haven't discussed yet, is the Zoom Phone business which is using Zoom's capability to power your internal phone systems. And remember, Zoom several years back, I mean, Eric Vaughn worked, I believe, at Cisco on the Webex product.
BRIAN SOZZI: Yep.
MYLES UDLAND: So this is an enterprise company at its core and certainly it's become consumerized and there's the small business component, as you mentioned, that's more than a third of the company's business comes from those companies with fewer than 10 employees. But this is a big time B2B SaaS play if we go back three or four years in the story.
So the Zoom Phone part of the business, which is growing quickly in which they mentioned, they're going to deal with Exxon Mobil, they're adding more than a million seats in the most recent quarter I think is what they shared on the call. That's where there is some excitement on it but is Zoom Phone a compa-- you know, is that something that needs to trade at the multiples that we're discussing here?
And I think that the answer today preliminarily is no but sort of what that looks like longer term and where this story settles is a big outstanding question. And also I would just echo back to our conversation yesterday, ahead of this report that Zoom and Peloton, the two clear obvious darling winners, we can throw Amazon in there but it's a very different company, very much bigger blah, blah blah.
Zoom and Peloton, the cleanest winners of the pandemic, they have now had their stories completely changed with the most recent reports out in the last three days. And where does that leave, let's call it pandemic trade 1.0? I think it's reeling to say the least.