What does muted growth mean for the Zoom share price?

On the face of it, Zoom’s [ZM] most recent earnings don’t look that bad.

The company surpassed estimates, with earnings per share coming in at $1.11 versus $1.09 expected by analysts, according to Refinitiv. Revenue was $1.05bn versus analysts’ expectations of $10.2bn and up 35% from the $777m reported in the same quarter last year.

But it wasn't all good news. The kicker was that revenue was up just 2.9% sequentially. Sales have been slowing over the previous few quarters. The three months to the end of July saw revenue climb 53% year-on-year, whereas the prior quarter had seen a growth rate of 191%. The videoconferencing platform expects sales to be flat sequentially in Q4 2022, which would represent a 19% year-over-year increase. Compare this to the 369% growth rate the company enjoyed in Q4 2021 when remote working was at dizzying heights, and it seems clear that Zoom has hit a ceiling.

In reaction to the earnings report, the Zoom share price dropped to a low of $195.80 on 23 November. It then fell further after Microsoft [MSFT] launched a spliced version of its videoconferencing solution, Teams, targeted straight at Zoom’s customer base. At closing on 2 December Zoom’s shares were at their lowest this year at $191.75.

The evolving working environment

Zoom’s growth in Q3 2022 was driven by strength in its direct and channel segments, which grew at twice the rate of its online revenue. There were also improvements in the churn rate of its online and direct segments.

Zoom ended the quarter with 2,507 customers that contributed $100,000 or more in trailing 12 month revenue. This was up 94% from Q3 2021. These bigger-value customers represented 22% of total revenue, up from a 18% share in the year-ago quarter.

There were also 512,100 customers with 10 or more employees at the end of the third quarter, up 18% year-over-year. They accounted for 66% of total revenue, up from 62% in Q3 2021.

Zoom’s CFO Kelly Steckelberg said on the recent earnings call that the quarter’s trends indicated that customers with 10 employees or more are expanding their use of the platform and adding more products – Zoom Phone and Zoom Room being the most popular.

However, with Microsoft’s offering of ‘Teams Essentials’ priced at $4 per month per person, Zoom’s sales and profitability could both come under pressure.

Steckelberg acknowledged that there would be some other headwinds going forward.

“We do see some impact from the holidays towards the end of December. And these holidays vary by global location, but we do see slowdowns based on that, in terms of what we expected from online [revenue],” Steckelberg said.

The company’s online business faces another short-term headwind: smaller customers and consumers are still adapting to the evolving work environment, Steckelberg added.

The company provided revenue guidance for the fourth quarter of between $1.051bn and $1.053bn. According to Zacks data, the analyst consensus is slightly lower at $1.05bn.

Positive signs, or an overhyped growth story

"Usage patterns for Zoom's smaller customers continue to normalise and could remain a headwind for two to three more quarters," Oppenheimer analyst Ittai Kidron said in a report seen by Investor’s Business Daily. "However, we're encouraged by the execution with larger customers and continued upmarket gains."

Other analysts take a more cautious view of Zoom’s growth story, though. In reality, the company’s revenue was never going to match that seen in 2020 due to the pandemic hype. To this end, the Zoom share price and revenue growth rate was always going to fall from its heady heights.

“Usage patterns for Zoom's smaller customers continue to normalise and could remain a headwind for two to three more quarters...However, we're encouraged by the execution with larger customers and continued upmarket gains.” - Oppenheimer analyst Ittai Kidron

“While we're positive on Zoom's strategic initiatives and investments in key growth areas, we find it tougher to like a stock with more sharply decelerating growth and incremental pressure on profitability," Deutsche Bank analyst Matthew Niknam wrote in a note to clients seen by S&P Global Market Intelligence. 

Niknam lowered the firm’s rating for Zoom from ‘positive’ to ‘hold’ and cut price target from $350 to $280.