Analyst on Zoom earnings: ‘This isn’t a temporary benefit they’re seeing’

Zoom reported fourth quarter earnings that beat expectations. D.A. Davidson Managing Director Rishi Jaluria joins Yahoo Finance Live to discuss.

Video Transcript

- Welcome back to Yahoo Finance Live. Shares in Zoom, the video conferencing giant, are trading lower here today despite some strong numbers being posted after the bell. They quieted the doubters with another strong earnings report bringing their two day gains, so one point up to 15%. A little bit less now. Revenue for Zoom's latest quarter surged 369% to $882.5 million.

That was versus the 811 analysts expected. Adjusted earnings per share also beat coming in at $1.22 a share versus the $0.79 expected. Strong quarter. Take a listen to what Zoom's own CFO had to say about that.

KELLY STECKELBERG: Well, we've seen strong performance across all aspects of our business. Our core meetings, channel, direct and online businesses all grew. As we announced yesterday, we have over 400,000 customers with greater than 10 employees. We also have strong-- saw a really strong performance from Zoom Phone, which just turned two recently. And we announced yesterday we have over 18 customers with more than 10,000 seats. So really strong performance in that upmarket.

- Maybe more importantly too, the winner of Yahoo Finance's Company of the Year Honors last year also forecasted growth that would continue despite critics saying that our return to normal would hurt Zoom. And so for more on that, I want to bring our next guest here, Rishi Jaluria. DA Davidson Managing Director joins us right 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. That was above the estimates of 829.5 million. So what do you make of maybe that company proving the doubters wrong? That it's not going to fall off a cliff here as we get back into the office?

RISHI JALURIA: Yeah. Thank you so much for having me. Always great to be on your show. Look, that was exactly my read. Right? There were the doubters saying, hey, this is a little bit of a flash in the pan.

Zoom's pulled forward their entire market opportunity and clearly the fact that they're talking about growing more than 40% in 2021, in spite of the fact that they more than quadrupled their revenue in 2020, I think is actually pretty amazing to me. And it really speaks to the fact that this isn't a temporary benefit they're seeing. The future work is going to be very hybrid in nature and Zoom really enables that to happen.

Right? It enables the hybrid workplace and it's going to be a critical part of that going forward. So I think the numbers show that this is going to continue to grow at a really strong clip post pandemic and do so very, very profitably. Right? Because you also got it for very strong profitability next year.

- Rishi, we've seen the-- we've heard from the company be very clear that they believe they are well beyond this video conferencing platform right now. Although, a significant part of the revenue is still coming from that. You've got a pretty aggressive price target of $600 a share. What are the other services beyond video conferencing that you think will get it to that kind of price and valuation?

RISHI JALURIA: Yeah, absolutely. Look, I think there's kind of three categories I'd put it into, right? One is adjacent to video, and that's where you can leverage the fact that they have what I think is the best video conferencing technology out there into other use cases, which includes embedding it into your applications. It includes things like telemedicine, education, as well as events management, right?

And that's one big piece of it. The second is adjacent areas that they're already in and that's where you heard Kelly talking about Zoom Phone in the clip that you just showed before this. And I think there's still a huge opportunity for them to go after, even within the existing customer base, right?

Only 2% of the existing customers are using Zoom Phone today. And there's a large install base out there of Cisco and Avaya for them to be able to unseat. And then the third category, I think is going to be future areas within broader enterprise communication and collaboration that I think they're going to expand into and that would include things like channel based messaging, right?

Which would compete more directly with Slack. It would be things like email, calendar, even contact center. And then that can happen both internally developed and through M&A, right?

Because they have got more than $4 billion of cash that they can put to work on the balance sheet. So really I think those three areas are where I can get to my $600 price target. And really, if we think some of these things in the third category I talked about take off, really beyond that.

- Yeah. I want to talk about that price target. Let's talk valuation too, because it seems like right now would be a tricky time to be projecting valuations out there as we see kind of tech take hits not just today, but also last week in the sell off. Zooms at, what?

29 times enterprise value to calendar year 2022 expected revenue. Your price target would imply 39 times, right? So I mean, how might that change if investors all of a sudden start to shift away from some of these tech names?

RISHI JALURIA: Yeah and it's a fair question. You know, look, I will point out number one, there are-- this is not the most expensive stock in software. You know, I can name at least eight or 10 others that have a higher multiple, in spite of the fact that Zoom is by far the fastest growing out of any of them.

But I think number two is that, you know, look, multiples are a little bit of a shortcut, right? We have to think really long term, what does this company look like? And this is something that I see rarely in software, right?

This reminds me of kind of earlier days of Salesforce, or ServiceNow, or Viva. And if we think about it, how big of a company this can be and really how profitable it can be five years, 10 years from now, that I think can more than justify the current price target I have. And again, beyond that, even if there is a broader pullback in tech.

- Rishi, who do you think poses the biggest threat to Zoom's growth story right now? Is it Slack and Salesforce? Is it Microsoft? How are you looking at the competitors?

RISHI JALURIA: It's Microsoft, right? And if we had this conversation about any other company in software, the answer would also be Microsoft very likely. They're clearly getting very aggressive with Microsoft Teams and they've gotten a lot of success and traction, especially during the pandemic.

And part of what I think-- There's two reasons, right? Number one is they're giving it away for free with anyone who's an Office 365 customer. But number two is the bundling strategy, right? And the idea is that Microsoft Teams is a combination of videoconferencing, and messaging, and content management, right?

So you're getting somewhat of Zoom and Slack and Dropbox in one solution. And that's why I think it is really important for Zoom to expand into a broader communications platform versus staying as just a videoconferencing tool and that's clearly the direction they're going. But Microsoft is absolutely the biggest threat to them.

- Rishi Jaluria, DA Davidson Managing Director, it's good to talk to you today.