Zoom’s valuation has entered ‘uncharted territory:’ Analyst

Video conferencing giant Zoom (ZM) delivered a blow-out first quarter, but the stock’s “valuation is hard to justify,” warns Dan Romanoff, analyst at Morningstar.

Zoom’s revenue last quarter jumped 169% year over year as the COVID-19 pandemic forced people to work from home. Not only has Zoom’s customer base surged, so has its stock price. Year-to-date shares of Zoom are up more than 220%.

“We are in un-chartered territory model-wise after huge quarterly upside in the face of the COVID-19 recession along with sharply higher guidance,” wrote Romanoff, noting Morningstar raised its new fair value estimate on the stock from $62 to $116. Shares are currently trading around $220.

“We note shares have approximately tripled year to date thus far, so even  allowing for a complete model reset, we still cannot come close to supporting the current share price within the context of our DCF model,” wrote Romanoff. DCF refers to ‘discounted cash flow’, a metric used to value a company based the present value of expected future cash flows.

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Romanoff goes on to highlight “two related controversies” surrounding the stock: How rapidly Zoom’s user-base will grow, and how long robust growth can continue.

Zoom notes the number of customers with more than 10 employees grew 354% from the same period a year ago. The company also highlighted clients paying more than $100,000 grew 90% year over year to 769 customers.

“Clearly larger customers added meaningfully to their seat count,” wrote Romanoff.

A group of people dial into a video call. (Getty Creative)

As for the software’s security issues raised earlier this year, the analyst says those have largely been addressed. Zoom upgrades and its recent acquisition of startup Keybase for encrypted communications has helped it gain back the approval of The New York City Public School System which is allowed to use the software again.

As for guidance, the company substantially lifted the range for its full year revenue, coming in far above Street estimates.

Still, Romanoff warns Zoom is still in the early stages of its life cycle, which trades at higher multiple to peers.

“While the company is expected to produce revenue growth at the high end of peers and the premium may be justified, higher absolute valuation offers less room for missteps and therefore carries greater inherent risks,” wrote the analyst.

“At high valuation levels, companies can often become momentum stocks that are punished severely if they do not deliver against expectations, which are regularly higher than consensus,” he added.

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Ines covers the U.S. stock market for Yahoo Finance. Follow her on Twitter at @ines_ferre

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