Zoom Fatigue Sets In Early -- Heard on the Street

By Dan Gallagher

Zoom Video Communications' winter won't be one of discontent. Spring might be another story.

The videoconferencing provider that has become an investor darling during the pandemic posted another blowout quarterly report Monday afternoon. Revenue more than quadrupled on a year-over-year basis to $777 million for the fiscal third quarter ended Oct. 31, exceeding the company's already-robust projection by 13%. Zoom also projected similar growth for its fourth quarter ending in January and expects to close out the fiscal year with operating earnings between $865 million and $870 million. It made about $12.7 million the previous year.

But unlike the cheering that accompanied Zoom's blowout numbers three months ago, investors took this report badly. The stock slipped 5% following the results in after-hours trading. Gross margins slipped 4 percentage points from the second quarter, due in part to growing public cloud costs to accommodate booming demand. Walter Pritchard of Citi also noted "buy side expectations" that had projected revenue north of $800 million for the third quarter as a reason for the letdown.

The reaction could have been anticipated for a stock that has boomed more than 600% this year -- well ahead of even other pandemic-hyped names such as Peloton. It also reflects the challenges Zoom is likely to face heading into next year. Recent vaccine breakthroughs suggest strongly that life will begin returning to something like normal by spring. Businesses -- still Zoom's core market -- will no doubt continue to make robust use of videoconferencing services well into the future. But Zoom noted Monday that a "significant percentage" of recent usage comes from both free and paid users from the education sector, which means kids returning to school will create a drag on the company's growth.

Longer term, Zoom's lofty valuation of more than 47 times forward sales will also put the company under some pressure to show what other tricks it has up its sleeve once the day comes that people can actually drink, work out and study in person again. Zoom's stated mission is to deliver happiness. As the next year proceeds, though, happiness for a growing number of people will mean a lot less Zoom.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

November 30, 2020 19:50 ET (00:50 GMT)

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