Zoom stock slips further as revenue growth slows – August 23, 2022

Zoom reports Q2 earnings, revenue growth falls to single digits

Video conferencing company Zoom (NASDAQ: ZM) reported Q2 earnings on Monday. While earnings managed to beat estimates, revenue growth fell to 8% YoY. The company has also ramped up its marketing spend, resulting in a steep drop in net income. The figure fell from $316.9 million in Q2 2021, down to just $45.7 million this year.

Zoom managed to post a surprise EPS of $1.05, as opposed to the $0.94 expected by analysts.

Total revenues for the quarter amounted to $1.1 billion – a narrow miss compared to the $1.12 billion forecast. Quarterly enterprise customer growth fell to 3%, totaling 204,100 customers.

Pandemic growth is not enough to sustain Zoom in the long run

The Covid-19 pandemic saw full lockdown measures across most of the developed world. With millions of employees now working from home, the demand for online communication solutions skyrocketed. Zoom fully capitalized on the demand and saw unprecedented revenue growth during the peak pandemic years of 2020 and 2021.

Revenue grew from $622.7 million in 2020 to almost $4.1 billion in 2022. While such explosive growth was unsustainable in the long run, the lifting of lockdown measures saw the stock tumble from $560 in 2020 to regularly trading below the $100 mark in 2022.

The management of the company was well aware of the potential drawback to such explosive growth and started to lower revenue outlooks in their guidance.

Fierce competition ramps up the pressure on Zoom

Competition from Microsoft Teams, Cisco, and others has saturated the market and placed significant pressure on Zoom. The company’s stock has plummeted and has fallen below $100 multiple times since the start of 2022.

Zoom and Microsoft Teams have been leading the video conferencing market since the peak of the pandemic. Q2 saw the sixth consecutive quarter where Zoom’s growth declined. Despite the decline in stock price, Zoom’s balance sheet remains robust. The company has reported cash and cash equivalents of $5.42 billion for 2022. The debt also remains in check, totaling around $105 million payable by the company.

Macroeconomic factors are keeping growth stocks down

A slowing economy and high inflation have tested the patience of many investors. Slowing economic growth has had an adverse effect on growth stock in particular. Much of the pandemic growth attained by many growth stocks, including Zoom, has largely been reset.

The Federal Reserve has made it a goal to raise interest rates to the targeted 4,00%, which has caused significant fear of a coming recession. U.S economic forecasts have been less than encouraging and the year started with an exceptionally underperforming stock market.

Significant adjustments to Zoom’s earnings guidance

The aforementioned factors have forced Zoom to lower its guidance for the entire 2023 fiscal year. The company expects revenues to grow by 7%, falling just below the $4.4 billion figure.

Zoom’s president Greg Tomb also announced an adjustment to the pricing of the company’s services. The new pricing structure and additional features for Zoom One were announced during the quarterly Zoom call.

Zoom also announced the acquisition of Solvy, a startup working on developing conversational AI.

This news were not enough for some analysts, with Citi lowering its rating to ‘hold’ due to increasing competition and economic slowdown.