Zoom’s 3Q Profit Blows Past Estimates; Stock Drops 5%

Zoom Video Communications reported better-than-expected 3Q results. What’s more, its 4Q sales and earnings outlook also topped analysts’ estimates. However, shares of the video conferencing software company, which has skyrocketed more than 600% year-to-date, fell 5.1% in Monday’s extended trading session, as the company expects margin pressure in fiscal 2021.

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Zoom Video’s (ZM) 3Q EPS increased to $0.99 from $0.09 per share a year ago, surpassing analysts’ estimates of $0.76. Revenues spiked 367% year-over-year to $777.2 million and exceeded the Street’s consensus of $693.9 million, led by strong demand for video conferencing for work, school or socializing during the COVID-19 pandemic.

As for 4Q, the company forecasts EPS in the range of $0.77-$0.79, which is higher than the Street’s estimates of $0.66 per share. Zoom projects 4Q revenue in the range of $806-$811 million versus analysts’ expectations of $730.1 million.

For fiscal 2021 ending in January, the company anticipates revenue in the range of $2.575-$2.580 billion, representing about 314% increase year-over-year. Zoom Video expects fiscal 2021 EPS to be in the range of $2.85-$2.87.

Zoom CFO Kelly Steckelberg warned that gross margin is set to remain impacted in fiscal 2021. During the 3Q conference call, Steckelberg said “With the uncertainty of the longevity of the pandemic, it is unclear how long gross margins will be impacted as we remain committed to supporting the global community. Consequently, we expect gross margins to be consistent with Q3 into the next fiscal year before starting to improve towards our long-term target margin.” (See ZM stock analysis on TipRanks)

Following the results, Stephens analyst Ryan MacWilliams maintained a Hold rating on the stock with a price target of $375 (21.6% downside potential). He said “We continue to believe Zoom will grow into its valuation through its pull-forward in customer adoption, platform breadth expansion, and highly conservative Street estimates, which pave the way for a large magnitude of forward revenue revisions.” The analyst added “we remain constructive on Zoom’s competitive position and especially its Zoom Phone opportunity, though we are awaiting a more reasonable valuation entry point before getting involved here.”

Currently, the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 10 Buys, 9 Holds and 1 Sell. The average price target stands at $487.17 and implies upside potential of about 1.8% to current levels.