Focus on Q1 earnings: Revenue growth slows, valuation attractive (NASDAQ: ZM)
DISCLAIMER: This notice is intended for US recipients only and, in particular, is not intended for, or intended to be relied upon by, UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this rating is intended to be investment advice nor should it be relied upon in making investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may hold a position in stocks, securities or financial instruments referenced in this note. Any opinions, analyzes or probabilities expressed in this note are those of the author as of the date of publication of the note and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be clients of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe this presents a conflict of interest. significant potential or affects the content of its research or publications.
Before the Covid crisis hit, Zoom (NASDAQ:ZM) was yet another in a long line of video conferencing providers that promised to make video calling easier and not require you to call IT and ask them to explain what H.264 was and why you could see the back of your own head on screen, but no one from the Wichita office. Whereupon your IT staff would roll their eyes and wonder why the earth neurotypicals could never get the video call machine working.
Zoom really hit the big time when it became a verb at the start of the Covid lockdowns. Why Zoom rather than the many other players? No idea. Most likely senior marketing and public relations. Anyway, the surprise was that the quality of business was really, really good. If you watched ZM in early 2020 expecting to find another money-burning startup addicted to capital raises to keep the lights on, you would have been very surprised. No, this company is a cash monster and has been for a long time. It had been showing positive pre-tax FCF without leverage on a quarterly basis as early as July 2018, and since the April 2019 quarter, ZM has been positive in pre-tax FCF for the last twelve months, never missing a beat since then.
Revenue growth slowed significantly as lockdowns eased; growth now stands at 29% in TTM compared to nearly 300% in the April 2021 quarter. The company is moving towards annual growth (i.e. the fiscal year ending January 31 2023) by around 11%, which means that a significant deceleration is yet to come.
Margins of all kinds remain strong; TTM gross margins are at 75%, TTM EBITDA margins at 39% and TTM unleveraged pre-tax FCF margins at 31%. Note that EBITDA margins are climbing, while FCF margins are falling. This is because the evolution of the company’s working capital becomes much less beneficial – this itself is the result of selling far fewer long-term prepaid contracts. Growth in deferred revenue (prepaid, not yet delivered or accounted for) slowed to 283% per year. in the quarter of January 31, 2021 to 20% in the quarter of April 30, 2022.
The balance sheet remains unassailable, with over $6 billion in net cash now.
Here are the numbers.
The fundamental valuation is now attractive to buyers, in our view.
17.4x trailing twelve-month debt-free pre-tax free cash flow is a lower multiple than you’ll pay for former growing defense contractors such as Raytheon (RTX). Yet, compared to an RTX-like business, ZM is growing faster, has much higher cash margins, and is in a strong net cash position rather than being both leveraged and also subject to funding requirements. their company pension plan. ZM is, in our view, cheap on fundamentals.
Let’s take a look at the stock chart, which is very informative. You can open a full-page version, here.
From its October 2019 lows, ZM sets up 5 very strong waves to complete this wave 1 higher. The 5 waves were explosive. Wave 3 peaked at the 3.618 extension from the previous wave 1 and wave 4 peaked at the 4.618 extension from wave 1. The stock then saw a bigger drop from wave two and it was brutal. At the time of writing, the stock had traded a bit above the 100% retracement of this wave 1, then on the earnings print, it broke above that level. It should be noted that the stock had reached the A=C level, i.e. the C leg of that typical A-down, B-up, C-down corrective wave that you see in the chart – this leg C was roughly equal to leg A and it’s quite often a bottoming pattern.
What is the next step ? Hard to say. It is very likely in our opinion that ZM will climb somewhat, but we don’t think it is yet in a position to go to new highs in the style of a greater wave three. More likely, we think there is a relief rally to $165/share (the 2021 wave 1 peak) or $172 – just below the 0.786 Fibonacci retracement level that the action met on the way down, before perhaps falling back down a bit. If you want to play ZM, you now have a bottom in place, which is around $79/share, and you can set your stop-loss accordingly.
In personal staff accounts we have some ZM, but we are not adding any at this stage. The pace of reduced revenue growth still looks dramatic and we believe there are better places to invest new capital right now. If the technical picture changes – if ZM climbs above that 0.786 retracement level and then turns it into support – then we will be back.
Hold the note for now.
Cestrian Capital Research, Inc – May 23, 2022