Zoom Video Communications (ZM) reported their Q2 2022 earnings on August 30th and the market reacted by sending the stock price 15% lower. Were the results so bad? Let’s dig in.

I have written about ZM in this article and I am tracking their numbers before the pandemic hit. This is how their revenue growth looks like

Zoom Revenue Growth and Year-Over-Year Growth

Year Q1 Q2 Q3 Q4 Total
2020 $122m(103%) $146m (96%) $167m (85%) $188m (78%) $623m(88%)
2021 $328m (169%) $664m (355%) $777m (367%) $883m (369%) $2.65B (326%)
2022 $956m (191%) $1022m (54%) $1.015-$1.020B $4.005-$4.015B


When you are looking at this table, keep in mind that the calendar year 2019 is Fiscal Year 2020 and so on. In my previous article, I had written, one of the downsides of growth like this is that there are a lot of expectations built-in. They cannot keep growing at these rates.

At the end of Q1 2022, Zoom had guided for a 50% growth in their Q2 and they came in at 54% growth. So they beat their guidance. Now, it can be shocking to see growth rate slowing from 355% to 54%. However, if you bought into ZM, ask yourself, are you happy with a company that grew its revenues by 355% last year and grew another 54% on top of that this year. The stock price of ZM is falling after they released their earnings because they are guiding for no growth in the remaining half of the year. The Q3  and the full-year revenue guide is in italics in the above table. As you can see Q3 and implied Q4 revenues are pretty much similar to Q2 revenues.

I believe that ZM management is being conservative and will come in higher on their annual revenue. Let’s assume that ZM comes in at $4.015 B. This is the number that they are guiding. That will be above 50% growth over 2021 revenues (2.65B X 1.5 = $3.98B). Are you happy with a company that has an annual revenue of above $4B growing at 50% or more each year?

I know I am. After the fall in stock price, ZM is now valued at about $87B. That is Price to Sales Ratio of about 22 (87B/4B). For comparison, ServiceNOW (NOW), another SAAS company, that has a similar revenue run-rate compared to ZM ($4.5 B annual revenue for ServiceNow growing at 50%) has a market capitalization of $127B. That is Price to Sales Ratio of 28.

I want to share some more highlights from the most recent earnings report from ZM

  • Customers spending more than $100,000 in annual revenue grew by 241% compared to Q2 of previous year. Total number of customers that spend more than $100,000 is 2,278
  • In August, they will reach 2 million Zoom Phone seats sold. Zoom Phone is a new product that they launched in April of 2020.
  • They broke their record for the largest Zoom Phone deal to date twice in the same day in this quarter.
  • Gross margin in Q2 was 76.2% compared to 72.3% in last year.
  • Operating Income was $425 million which is about 42% Operating margin easily beating their estimates and analyst estimates.
  • Biggest story of the quarter. Operating Cash flow was $468 million and free cash flow was $455 million. Remember that their Q2 revenue is $1,022 million. So that means that they are generating about 45% of their revenues as Free Cash Flow.

In July Zoom announced that they will acquire Five9. FIve9 is a leading provider of cloud-based call center solutions. This earnings report did not include any revenue numbers from Five9 and the management did not provide any guidance on these revenues because this transaction is still under regulatory review. The revenue guide that ZM provided for the full-year will definitely need to be updated because Five9 revenues will be added to those revenues as well.

A Thought About Zoom Business

A lot of people think that ZM was a COVID stock and now that offices are opening up, people will stop using Zoom for their business. Do you believe that as well? If so, then this may be a good time to exit. I believe that people will still keep using Zoom for their business and it has a lot of room for growth. I use Zoom pretty much every day, sometimes more than once and I don’t think I am going back to Webex or Teams. I have tried them all. Zoom’s competitive advantage is its ease of use and the fact that it just works.

I saw this tweet yesterday and totally agree with it. Lot of people are thinking that Zoom’s business is limited but they are ignoring the other aspects of Zoom business that have enormous potential in my opinion. 

This is how I view this decline. If your time horizon is at least three years, I view this decline as a buying opportunity. I think ZM stock can easily double from here in the next 3-4 years. If you are looking for a short-term pop, you are not going to get it here. Zoom growth rate is declining. Some investors do not like to see growth rates fall from 350% to about 50% but the fact is law of large number says that companies cannot keep growing at triple digits forever and the growth rate will decline. You have to decide what is an acceptable growth rate for you as an investor.