Zoom Zoom

Zoom Zoom

Morning folks,

For an industry that claims to like certainty, Wall Street throws up quite a few shocks. The vast majority of the time, these shocks come in the form of bad news for shareholders. Thinking back over the last few years, here are the ones that really stand out:

  • Facebook reporting severe margin contraction in the summer of 2018. It was the largest one-day drop in history with the company shedding $119 billion in market cap.

  • Stamps.com announcing they had cut ties with the United States Postal Service in February 2019 causing the stock to drop more than 50%.

  • 2U Inc. announcing they were massively scaling back expansion plans in 2019 causing the stock to fall 60%.

It’s very rare that you are truly shocked to the upside — when an earnings report blows so far past expectations you need to do a double-take.

So it was, however, when Zoom Video Communications reported their first-quarter numbers last night. It was probably the most highly-anticipated earnings report this season given the current environment and the massive run the stock has had over the last three months as the coronavirus stock-de-jour.

Some of the highlights:

  • Adjusted earnings per share of $0.20 versus $0.09 expected

  • Revenue of $328 million versus $202 expected (+168% YOY)

  • 2021 full-year revenue guidance upped to $1.8 billion from about $900 million

  • Customers with 10+ employees up 354% YOY (265.4K)

  • Net Dollar Expansion Rate for Customers with 10+ over 130% for the eighth straight quarter

  • Customers spending over $100K up 90% YOY

  • Free cash flow of $251 million, up from $15.3 million this time last year

  • Free cash flow margin of 77%

These are truly unbelievable numbers. With all the hype surrounding the stock, I think most investors were expecting a great performance, but this was something else.

The stock is up about 5% as I write this, which isn’t what you would expect from such a blowout quarter. However, keep in mind that the stock is up about 190% since we added it in January and is now valued at $62 billion.

To those asking if it’s too late to invest, I think we need to consider what the company has to do to justify this valuation. It can’t simply be the number one teleconferencing platform. It needs to displace the work travel sector that has existed for decades, and it needs to do it with competition coming in from Google, Cisco, Microsoft, and Facebook.

It’s a tough ask. However, this is a business that is growing recurring revenues at lightning speed, owning its space, and generating hundreds of millions of dollars in cash to reinvest in the business.

It’s certainly off to a good start.