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Zoom's post-pandemic future draws mixed reactions from analysts

Zoom Video Communications Inc. continued its streak of pandemic-driven growth with another round of better-than-expected earnings, but analysts had mixed opinions about the company's future amid increasing signs of a looming slowdown.

After seeing year-over-year revenue rise more than 350% in the prior three quarters, Zoom's growth rate slowed to 191% in the quarter ended April 30, which was the first time the videoconferencing company faced a year-ago comparison against pandemic-fueled gains. The growth rate is expected to plunge further in the coming quarters to double-digit percentages, with analysts expecting revenue to flatten out above $1 billion in Zoom's fiscal third quarter, which ends in October.

For its 2022 full fiscal year, Zoom raised its guidance to between $3.98 billion and $3.99 billion, compared to the company's prior forecast of between $3.76 billion and $3.78 billion. The new range points to a growth rate of just over 50%. In comparison, the company's total revenue of $2.65 billion represented year-over-year growth of more than 325%.

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Zoom ended the quarter with 1,999 customers generating more than $100,000 in trailing-12-month revenue, up about 160% year over year. Customers with more than 10 employees grew by about 87% year over year for the company, to a total of 497,000, representing 63% of Zoom's revenue.

FBN Securities analyst Shebly Seyrafi estimates that revenue from customers with 10 or fewer employees grew 259% year over year with lower-than-expected churn, while revenue from customers with more than 10 employees grew 162% year over year. The analyst reiterated his "outperform" rating and $525 price target on the company's stock.

Analysts at Wolfe Research also maintained their "outperform" rating on the company's stock, albeit with a lower price target of $327.72.

"We come away from this earnings report with greater confidence around Zoom exiting the year at over 30% growth amidst a significantly improved margin profile," the analysts wrote in a research note. "While the stock is arguably the most controversial 'COVID winner' we believe that the incremental $100B+ total addressable market related to Zoom Phone and Zoom Rooms will create growth durability for many years to come."

Zoom Phone, the company's cloud-based voice-calling solution, surpassed 1.5 million seats at the end of April, up from 1 million in January.

Meanwhile, some analysts expressed concern about Zoom's significant drop in revenue growth. J.P. Morgan analyst Sterling Auty reiterated his "neutral" rating on Zoom shares but slashed his price target to $385 from $456.

"This quarter is going to be tough to read for the market," Auty wrote in a research note. "Do not get us wrong, 191% growth is impressive and results topped expectations, but the magnitude of quarterly upside continues to diminish and significantly more of the growth is now coming from existing customers."

Summit Insights Group analyst Jonathan Kees, who reiterated his "hold" rating on Zoom's stock but cut his price target to $350 from $425, argued that most people will use video less as they return to the office.

Meanwhile, Zoom is confident that it will remain a staple platform within most organizations and businesses, which the company projects are increasingly taking on a hybrid working model that incorporates both home and office work.

"In a recent survey we conducted, 80% of U.S. respondents agreed that all interactions will continue to have a virtual element post-pandemic, and that figure was even higher in many of the other markets we surveyed," Zoom CEO Eric Yuan said during the company's recent earnings call.

To tap the growing demand for hybrid, Zoom is pinning its hopes on new products that also advance the company's goal of evolving from a video-conferencing provider to an all-purpose communication and collaboration platform. Among these is the recently announced Zoom Events service, which will allow the company's enterprise clients to create, host and manage a range of virtual events.

Raul Castanon, a senior research analyst covering workforce collaboration and communication platforms at S&P Global Market Intelligence's 451 Research unit, said Zoom is well positioned to use its brand recognition as a top video communications provider to tap the burgeoning virtual events market.

"COVID caused a lot of events all over the world to turn to virtual environments and a lot of vendors that participated realized the advantages of not having to run these in person," Castanon said. "Even when live events are back on, many of these vendors are still going to be looking at virtual or hybrid events now, which is why Zoom is expecting significant growth in this area."

Both Microsoft Corp. and Cisco Systems Inc. are expanding their presence in this space as well, Castanon said, noting that the latter's acquisitions of tech platforms Slido and Socio Labs were precisely for this reason. Therefore, he thinks it is in Zoom's best interest to capitalize on the momentum it gained amid the pandemic with its video platform and expand its portfolio with a suite of products that include more productivity and collaboration apps and tools.

"Zoom will continue multiplying their business, even after the huge growth they saw during the pandemic, as long as they keep innovating and expanding their product line," Castanon said.