Can Zoom shares reverse post-pandemic losses in Q1 earnings?

Shares in Zoom have slumped from its coronavirus pandemic highs, but its first quarter earnings may provide some insight into how the company plans to hold on to its customer base moving forward. The video conferencing company is forecasting an uptick in revenue but a slowdown in earnings for the upcoming quarter, which is in line with analyst expectations.

It became the byword for pandemic video calls. But as employees have returned to the office, Zoom’s [ZM] fortunes have stalled – and its muted share price reflects that. Now, the company is delivering its first-quarter fiscal 2023 earnings on 23 May amid a backdrop of stock market volatility..

Zoom forecasts its first-quarter revenues at $1.07–$1.075bn, more or less matching Zacks Equity Research’s consensus forecast of $1.07bn and representing a year-over-year hike of 12.2%. However, its non-GAAP earnings are expected to come in at $0.86–0.88, against Zacks’ forecast of $0.88, which would be down 33% year-over-year.

Zoom’s share price story has been one of dramatic highs and lows. Its all-time peak came in October 2020 when vaccines still seemed a distant dream and the stock soared to a mighty $568.34. Since then, its value has slipped by a massive 84%. As of 19 May the stock was down 50.5% year-to-date, closing at $90.94 on 19 May.

As in-person meetings overtake virtual calls again, Zoom has multiple challenges to face. One is hanging on to its customer base. At the end of January, Zoom reported nearly 510,000 customers with more than 10 employees, a slump from the 512,000 in October. In the future, it will report enterprise customers instead, of which it had 191,000 in January, and which it predicts will grow by 20% this fiscal year.

Pillars of growth

Zoom’s fourth quarter and full year 2022 results, published at the end of February, proved to be disappointing. It published Q4 earnings per share of $1.29, significantly lower than the $1.06 forecast by Refinitiv analysts, according to CNBC.

It also posted $1.07bn revenue for the quarter, slightly ahead of the $1.05bn forecast. For the full year, revenue grew 55% to reach $4.1bn. While the results were somewhat mixed, they were sufficient to lift the Zoom stock 13% in after-hours trading on 28 February.

At the earnings call, Eric Yuan, Zoom’s founder and CEO, identified three pillars for the company moving forward: being a unified communications platform; business workflow, where Zoom can be integrated into other platforms; and hybrid work, saying: “No matter where you are – office, travelling or home – we want to make sure you have a consistent experience.”

Despite this show of optimism, Zoom posted weaker-than-anticipated revenue forecasts for the full year ahead. It predicts income of $4.53–4.55bn, which would imply an increase of 10.7% year-over-year. However, this missed Refinitiv analysts’ consensus predictions of $4.71bn, reported CNBC.

Zooming into the future

More than three years on from its IPO in April 2019, Zoom may no longer be every investor’s flavour of the day. But it may not turn out to be a pandemic ‘one-hit-wonder’ either. Video calls are likely to remain an important part of working life as many companies opt for a hybrid structure or allow employees to work fully from home.

Zoom is also diversifying beyond its core video conferencing offerings with new products and services such as Zoom Phones, Zoom Contact Center and Zoom Rooms — a strategy it hopes will pay off in the longer term.

Tomasz Tunguz at Redpoint Ventures recently pointed out that even with a dip of almost 70%, cloud software companies are trading 50% above the price-to-revenue multiples they were at in 2017, reported the Financial Times. However, Zoom needs to keep an eye on rivals such as Microsoft [MSFT] Teams and Alphabet [GOOGL]’s Google Meet.

Analyst James Fisher at Piper Sandler recently identified “limited upside” for Zoom, and downgraded the stock to ‘neutral’ from ‘overweight’. Its target price was reduced nearly 39% from $157 to $96.

Of 31 analysts polled by CNN Money, the consensus is to ‘hold’ Zoom’s stock, a position held by 16, with 12 ‘buy’, two ‘outperform’ and one ‘underperform’ rating. Among 24 analysts, the consensus median 12-month price target is $150, which would mark a 64.9% upside from the 19 May closing price of $90.94..