Despite reporting Q3 top- and bottom-line beats, Zoom guided low for 2022 and shares dropped 17% after earnings. Yet, experts see upside ahead for $ZM stock.
Zoom Video reported Q3 results on November 22, after the closing bell. Despite an EPS and revenue beat, poor guidance disappointed, and the stock sank more than 17% since earnings day.
After Zoom’s earnings bummer, several Wall Street experts updated their price targets lower. Still, following the recent selloff, consensus now suggests that ZM has upside potential of over 40% ahead, despite growth concerns in a post-pandemic environment.
Q3 earnings beat, but growth is a concern
Zoom Video reported EPS and revenue beats of 2 cents and $31 million, respectively. The results were far from disastrous, but they mattered little for investor sentiment. Poor guidance is what disappointed most, since Zoom forecasted lower growth than witnessed in the past two years.
The company expects Q4 revenues to climb only 19% YOY, which should be about in line with the $1.05 billion in revenues reported in Q3. It was not a surprise that Zoom would struggle to maintain the growth trajectory, as the stay-at-home trends of the pandemic year are no longer in place.
During Zoom’s earnings call, CFO Kelly Steckelberg spoke of the company’s challenges ahead:
"We're still having these online customers which are the most volatile [and] many of them are still on monthly contracts. And as they are adjusting to the environment and figuring out how the future of work is going to be for them individually, we expect that to be the challenging headwind."
Wall Street’s thoughts after Q3 earnings
Despite the company having announced challenges ahead, Wall Street analysts still believe that ZM could be undervalued and that it has substantial gain potential over the next year.
Based on 11 Wall Street analysts that offered twelve-month price targets on Zoom stock after Q3 earnings, 6 of them have a buy recommendation and 5 are neutral. Still, even though consensus rating is not a buy, 42% upside potential from current levels is projected, on average.
Morgan Stanley’s Meta Marshall says that Zoom Video outperformed low expectations in Q3 as execution has been consistent with the strategy. The analyst reinforced the buy recommendation and forecasts a $365 price, representing 76% upside potential. The bullish target takes into account massive growth of 94% in revenues from customers contributing more than $100,000; and above-average expansion of the larger enterprise vertical (i.e. 10 employees or more).
Piper Sandler’s James Fish lowered the firm's price target on ZM stock to $299 from $369, despite maintaining his buy recommendation and still seeing 44% upside potential ahead. He believes that Zoom’s Q3 results were "net-encouraging", and that the churn rate showcased stability. The price target cut was justified by “multiple compression and a trough likely to occur next year”.
Skeptical, with a neutral rating on ZM and a $235 price target, Evercore ISI’s Peter Levine forecasts margins coming down in January 2023, as the company ramps up investments in both research and development, and sales and marketing. Despite seeing a more reasonable valuation for Zoom, he also sees several challenges ahead for the stock.
Also skeptical, Deutsche Bank analyst Matthew Nikam lowered the firm's price target on Zoom Video to $280 from $350, maintaining a neutral rating on the shares following Q3 results. The analyst said that it is "tougher to like a stock with more sharply decelerating growth and incremental pressure on profitability”. However, he sees positive strategic initiatives in key growth areas.
Lastly, Mizuho analyst Siti Panigrahi also lowered the firm's price target on Zoom to $300 from $350, while he still maintained a buy recommendation on the stock and a 45% gain forecast. Zoom’s Q3 earnings above consensus “cleared a lowered bar”, aided by better-than-expected online churn ratio and revenue growth. The analyst also said that despite Zoom’s post pandemic growth being under pressure, Zoom Phone, Zoom Rooms and Video Engagement Center will remain crucial for hybrid workers going forward.