Stock of the week - Zoom Video Communications (04.03.2021)

• Zoom shares have rallied almost 400% in 2020

• Company greatly benefited from coronavirus pandemic

• Solid fiscal Q4 2021 results (calendar Q4 2020)

• Company sees strong growth continue this year

• Price-to-sales ratio at pre-pandemic levels

Zoom Video Communications (ZM.US) has been one of the pandemic wonders. Work-from-home schemes caused demand for the company's software to skyrocket and has sent shares almost 400% higher in 2020. However, as the pandemic is slowly being contained, thanks to vaccines, is the outlook for Zoom still favourable?

Overview

Zoom Video Communications (ZM.US) can be considered lucky when it comes to the impact pandemic had on its business. Zoom is a provider of software for large group video calls, and demand for such software has been limited before the coronavirus pandemic. However, when lockdowns arrived, it turned out that Zoom's software is the only one that can handle large scale video meetings. Company's business improved massively and in spite of some PR failures, sales and profit increased significantly. However, as the vaccination process is gathering pace, one may expect people to start returning to offices and demand for Zoom's products to fall. This is not necessarily the case as it looks to be a permanent trend that at least some of employees will continue to work remotely even after pandemic subsides.

Zoom managed not only to boost sales significantly during pandemic year (fiscal 2021) but also greatly expand net profit margin. Source: Bloomberg, XTB

Earnings

Zoom has released earnings for fiscal Q4 2021 (ended January 31, 2021) after the close of the Wall Street session on Monday. Results turned out to be much better than expected. Sales increased almost 370% year-over-year to $882.5 million (exp. $811 million). EBITDA jumped from $18.3 million to $370.4 million (exp. $267.6 million) and EPS moved from $0.05 to $0.88 (exp. $0.49). Company's gross margin increased from 66.7 to 69.7%. Zoom said that the number of customers with more than 10 employees increased to 467,100 at the end of fiscal Q4 2021, up 470% on an annualized basis. Growth of customers generating over $100,000 in revenue accelerated from 136 to 156%.

Outlook

Strong earnings in fiscal Q4 (November-January period) can be partially reasoned with resurgence of pandemic in many countries and reimposition of lockdowns. Nevertheless, the company stays upbeat on its outlook for the post-Covid business. Zoom Video Communications expects adjusted EPS in fiscal-2022 (February 2021 - January 2022) to reach $3.59-3.64, up from $2.27, and sales to reach $3.76-3.78 billion, up 42% from fiscal-2021. 

A point to note is that while a lot of the "pandemic winners" have bubble-like valuations, this is not necessarily the case for Zoom Video Communications. Indeed, the share price has risen dramatically throughout 2020 but so has expanded the company's business. In fact, Zoom shares are trading at a lower sales multiple right now than they did at the beginning of the coronavirus pandemic.

Thanks to a massive improvement in business, steep share price increase in 2020 has not created bubble-like conditions in Zoom Video shares. Company's price-to-sales ratio is actually lower than it was a year ago at the beginning of the coronavirus pandemic. Source: Bloomberg, XTB

Technical Analysis

Share price of Zoom Video Communications (ZM.US) reached an all-time high in October 2020 at almost $590. However, stock has been trading lower since and has moved to the early-2021 low at $340. Stock has delivered two upward corrections of an equal size recently and according to the Overbalance methodology, sentiment remains bearish. Breaking below the aforementioned $340 area and painting a new lower low would confirm this picture. This week's earnings release caused a stock to open with a big bullish price gap on Tuesday but all of the gains have been erased already. 127.2% ($299) and 161.8% ($257) exterior retracement of a recent upward correction are first supports to watch in case a break below $340 occurs.

Source: xStation5