Zoom reported fourth quarter earnings that exceeded expectations. DA Davidson’s managing director, Rishi Jaluria, joins Yahoo Finance Live to discuss.
Video transcription
– Welcome back to Yahoo Finance Live. The shares of Zoom, the videoconferencing giant, are being traded down here today, despite some strong numbers being released after the bell. They calmed those who doubted it with another solid earnings report by bringing their two-day earnings, then a point to 15%. A little less now. Zoom’s last quarter revenue increased 369% to $ 882.5 million.
This was against the 811 analysts expected. Adjusted earnings per share also hit $ 1.22 per share against the expected $ 0.79. Strong quarter. Hear what Zoom’s CFO himself has to say about it.
KELLY STECKELBERG: Well, we have seen strong performance in all aspects of our business. Our central meetings, channels, direct and online businesses have grown. As we announced yesterday, we have more than 400,000 customers with more than 10 employees. We also saw a very strong performance from the Zoom Phone, which recently turned two years old. And yesterday we announced that we have more than 18 customers with more than 10,000 licenses. Really strong performance in this luxury market.
– Perhaps more importantly, the winner of Yahoo Finance’s Company of the Year award last year also predicted growth that would continue, despite critics saying that our return to normal would hurt Zoom. And to find out more about this, I want to bring in our next guest, Rishi Jaluria. Managing Director DA Davidson joins us now on the split screen.
Rishi, when we look at the numbers that they were projecting, also better than expected. They say 900 million to 905 in the current quarter. This was above estimates of 829.5 million. So, what do you think of the company proving that the doubtful ones are wrong? That it won’t fall off a cliff here when we get back to the office?
RISHI JALURIA: Yes. Thank you very much for having me. It is always good to be on your program. Look, that was exactly my reading. Right? There were those who doubted it saying, hey, this is a little flash in the pan.
Zoom has pulled forward all of its market opportunity and clearly the fact that they are talking about growing more than 40% in 2021, despite the fact that they have more than quadrupled their revenue in 2020, I think it is really incredible for me. And it really shows the fact that this is not a temporary benefit that they are seeing. The future work will be very hybrid in nature and Zoom really allows that to happen.
Right? This makes the hybrid workplace possible and will be a critical part of that in the future. So I think the numbers show that this is going to continue to grow at a very strong post-pandemic rate and very, very profitably. Right? Because you also achieved a very strong profitability in the next year.
– Rishi, we saw – we heard from the company making it very clear that they believe they are way beyond this videoconferencing platform now. However, a significant portion of revenue still comes from this. You have a very aggressive price target of $ 600 per share. What other services besides videoconferencing do you think will get this kind of price and evaluation?
RISHI JALURIA: Yes, absolutely. Look, I think there are three categories that I would put in, right? One is adjacent to the video, and this is where you can take advantage of the fact that they have what I consider the best videoconferencing technology available in other use cases, which includes incorporating it into your applications. It includes things like telemedicine, education, as well as event management, right?
And that is a big part of that. The second is the adjacent areas where they are already and that’s when you heard Kelly talking about the Zoom Phone in the clip you just showed. And I think there is still a great opportunity for them to go after it, even within the existing customer base, right?
Only 2% of existing customers are using Zoom Phone today. And there is a large installed base from Cisco and Avaya for them to remove. And then the third category, I think there will be future areas within the broader corporate communication and collaboration that I think they’re going to expand on and that would include things like channel-based messaging, right?
That would compete more directly with Slack. It would be things like e-mail, calendar and even contact center. And that can happen both internally and through M&A, right?
Because they have more than $ 4 billion in cash that they can put to work on the balance sheet. So, I really think these three areas are where I can reach my $ 600 price target. And really, if we think that some of those things in the third category that I talked about take off, way beyond that.
– Yes. I want to talk about that target price. Let’s talk about valuation as well, because it looks like now would be a tricky time to design valuations, as we see the type of technology being attacked not only today, but also last week on liquidation. Zoom in, what?
29 times the company’s value in relation to the expected revenue for the calendar year 2022. Your target price would imply 39 times, right? I mean, how can that change if investors suddenly start moving away from some of those tech names?
RISHI JALURIA: Yes and it is a fair question. You know, look, I’m going to point out number one, there are – this is not the most expensive software stock. You know, I can name at least eight or 10 others who have a higher multiple, despite the fact that Zoom is by far the fastest growing of any of them.
But I think number two is that, you know, multiples are a little shortcut, right? We have to think a lot in the long run, how is this company? And this is something that I rarely see in software, right?
It reminds me of the early days of Salesforce, or ServiceNow, or Viva. And if you think about it, how big this company can be and how profitable it can be five, ten years from now, which I think can more than justify the current target price I have. And again, moreover, even if there is a broader setback in technology.
– Rishi, who do you think represents the biggest threat to Zoom’s growth story now? Is it Slack and Salesforce? Is it Microsoft? How are you seeing the competitors?
RISHI JALURIA: It’s Microsoft, right? And if we had this conversation about any other software company, the answer would most likely also be Microsoft. They are clearly getting very aggressive with Microsoft Teams and have had a lot of success and traction, especially during the pandemic.
And part of what I think– There are two reasons, right? First of all, they are giving away for free to anyone who is an Office 365 customer. But number two is the packaging strategy, right? And the idea is that Microsoft Teams is a combination of video conferencing, messaging and content management, right?
So you’re getting a little Zoom, Slack and Dropbox in one solution. And that’s why I think it’s really important that Zoom expands to a broader communication platform instead of just being a video conferencing tool and that’s clearly the direction they’re taking. But Microsoft is absolutely the biggest threat to them.
– Rishi Jaluria, Executive Director of DA Davidson, is delighted to speak with you today.