On Thursday, Goldman Sachs (NYSE:GS) updated its assessment of Zoom Video Communications , Inc. (NASDAQ:ZM), raising the price target to $72 from the previous $70 while maintaining a Neutral rating. The adjustment follows Zoom's second-quarter fiscal year 2025 results, which surpassed expectations on several financial metrics.
The company reported a modest revenue increase of 1% compared to consensus estimates and demonstrated operational efficiency with an operating margin (OPM) of 39%, which is 300 basis points higher than expected. Additionally, Zoom's free cash flow margin (FCFM) was 31%, exceeding consensus by 300 basis points.
These positive results have led to a 12% intraday rise in Zoom's stock price, as investors responded to the company's improved financial guidance. The updated forecast includes a 0.4% increase in FY25 revenue, with 0.1% of that increase excluding the quarterly beat, and a 300 basis point boost in FCFM.
Goldman Sachs noted several developments that contribute to a more optimistic outlook for Zoom. The company has seen significant growth in its Contact Center customer base, with over 1,100 customers representing a year-over-year increase of more than 100%. Additionally, Zoom has secured 69 Workvivo customers with annual recurring revenues (ARR) exceeding $100,000, indicating progress in its multi-product strategy.
The introduction and ramping up of AI features have also been successful, with 1.2 million AI Companion Accounts created compared to 700,000 in the previous quarter. This is expected to support the gross retention rate (GRR).
Moreover, Zoom has achieved a record low online churn rate of 2.9%, and customer-related prior period (cRPO) growth has shown an uptick to 10% year-over-year, a significant increase from 5% in the previous quarter.
Despite these positive indicators, Goldman Sachs remains cautious, noting several factors that prevent a more bullish stance on the stock. Online churn, while at a record low, is still considered unsustainably high.
The core Zoom product is underperforming, and the cRPO growth has not yet led to an acceleration in revenue. Furthermore, the departure of Zoom's CFO introduces potential execution risk, although the firm acknowledges the extended transition period and a robust internal finance team as mitigating factors.
In summary, while there are promising signs of growth and expansion, Goldman Sachs believes the risk-reward balance for Zoom's stock is even and prefers to wait for more evidence that improvements in the core product and new product adoption will lead to sustained revenue growth.
In other recent news, Zoom Video Communications reported an increase in total revenue by 2% year-over-year, reaching $1.16 billion for the second quarter of fiscal year 2025. The company's non-GAAP income from operations exceeded guidance at $456 million, and non-GAAP diluted net income per share surpassed expectations at $1.39. Zoom has also announced the impending departure of CFO Kelly Steckelberg, post the Q3 earnings report.
In light of robust performance in its Enterprise segment and expansion in offerings like Workvivo and Zoom Contact Center, the company has revised its full-year revenue outlook to between $4.63 billion and $4.64 billion, with non-GAAP earnings per share anticipated to be between $5.29 and $5.32. These are part of the recent developments at Zoom.
Despite acknowledging challenges in the EMEA region due to ongoing conflicts, Zoom remains confident in its innovative offerings and strategic market positioning.
The company's AI capabilities and the seamless integration of its Contact Center are driving customer trust, as reflected in the closure of its largest deal to date in Q2. Zoom's strategy includes focusing on the upmarket segment and leveraging M&A opportunities to add new services.
InvestingPro Insights
Zoom Video Communications, Inc. (NASDAQ:ZM) showcases a robust financial position according to the latest InvestingPro data. With a market capitalization of approximately $20.96 billion, Zoom stands out with an impressive gross profit margin of 76.05% over the last twelve months leading up to Q1 2023. This high margin is indicative of the company's operational efficiency and aligns with Goldman Sachs' recognition of Zoom's strong operating margin in its recent assessment.
InvestingPro Tips further emphasize the company's strengths, highlighting that Zoom holds more cash than debt on its balance sheet, which provides financial flexibility and reduces risk for investors. Additionally, the valuation of Zoom implies a strong free cash flow yield, reinforcing the company's ability to generate cash and support its growth initiatives. These factors are pertinent for investors considering Zoom's financial health and future prospects.
For those looking to delve deeper into Zoom's potential, there are 7 additional InvestingPro Tips available at https://www.investing.com/pro/ZM, which provide further insights into the company's performance and analysts' predictions for profitability this year.
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