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Zoom Is Unlikely to Lose Too Much Growth Momentum. Here's Why

Shares of videoconferencing darling Zoom Video Communications (NASDAQ: ZM) crashed after guidance for the second half of this year failed to impress investors. The stock is back near 52-week lows, and at nearly half the value it had last autumn when shareholder optimism was sky-high.

Though videoconferencing isn't (quite) the same absolute necessity it was early in the pandemic, many investors are forgetting about the pending acquisition of Five9 (NASDAQ: FIVN) and all it means for Zoom's aspirations for the business world. Revenue growth guidance may not have been what was hoped for in the balance of 2021, but Zoom's momentum is unlikely to stall out for long, if at all.

Image source: Getty Images.

About that guidance...

Zoom's Q2 fiscal 2022 (the three months ended July 31, 2021) revenue was $1.02 billion, obliterating management's guidance provided three months prior for revenue to be as much as $990 million. The company is a frequent underpromiser and overdeliverer on this front, so the Q2 results weren't the issue.

Instead, it was Q3 guidance for sales to be as high as $1.02 billion, up 31% from a year ago but flat on a sequential basis with Q2. Zoom's growth is easing way back from the torrid triple-digit-percentage pace it set last year when videoconferencing was all the rage during mandatory lockdowns and social distancing orders. Small business and individual subscribers in particular are causing this slowdown. Customers with 10 or fewer employees represented 36% of revenue, compared to the high of 38% during Q3 (last summer and early autumn).

Part of this softening individual and small business metric could in part be blamed on the easing of the pandemic, but it's also a function of Zoom's focus on large enterprises. The number of Zoom users spending at least $100,000 a year was up 131% from a year ago in Q2. Individuals and small businesses may be easing back in their reliance on videoconferencing software, but big businesses sure aren't. Zoom might again be taking the conservative approach in forecasting its Q3 expectations.

An acquisition to the rescue?

Investors may be fretting about the near-term outlook for Zoom's revenue as it laps its peak pandemic boom, but this is an enduring growth story. It's clear that large enterprises plan on using video even as the pandemic wanes.

And there's another catalyst that will keep Zoom's momentum rolling: The pending acquisition of business contact center software firm Five9. The takeover is expected to be completed sometime during the first half of calendar year 2022, but if Five9 had been included in Zoom's Q2 results, it would have added an additional $144 million in revenue (or in percentage terms, it would have increased Zoom's sales by 14% more). Plus, Five9's sales were up 44% from the year prior, so it is itself a high-growth business. Paired with Zoom's own work updating organizations' communications systems for the cloud computing era, Five9's contact center technology will only strengthen the combined companies' ability to continue growing.

Zoom will have another quarter or two of results to report before Five9 joins the fold, and its current full-year outlook for revenue to increase 51% over and above results from year one of the pandemic might continue to disappoint some shareholders (since 51% represents further sequential slowdowns in growth). Trading for nearly 23 times expected current year sales, Zoom is still "expensive" and valued under the assumption it will continue expanding at a fast clip for quite some time.

But given its stand-alone financials as well as impressive expansion at soon-to-be subsidiary Five9, Zoom's momentum is unlikely to lose much steam. The sharp sell-off after another fantastic quarter looks like yet another buying opportunity for this leader in modern communications services.

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Nicholas Rossolillo and his clients own shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Five9 and Zoom Video Communications. The Motley Fool has a disclosure policy.


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