Zoom Stock Drops Despite Beating Earnings Expectations

Zoom Video Communications (ZM) stock fell on Monday, underperforming the broader market, despite reporting financial results that beat expectations on both the top and bottom lines. The company's share price dropped by 6.46% on the day of the earnings release, which was a significant decline compared to the S&P 500's gain of 0.61% and the Dow's gain of 0.97%.

Zoom's financial results for the fiscal third quarter of 2025 showed a modest beat and raise, with revenue up 3.6% year over year and guidance for the full year slightly higher. However, the modest performance may have disappointed investors who were expecting more significant growth. Additionally, the company's stock had risen over 50% in just a few months before the earnings report, which may have led some investors to take profits off the table, contributing to the stock's decline on Monday.



Zoom's earnings per share (EPS) have been declining over the past three years, with an annual drop of 7.6%. However, the share price decline of 21% was steeper than the EPS slippage, indicating that investors were too optimistic about the business in the past. In the nine months ending October 31, 2024, Zoom's revenue rose by around 3% year over year to $3.5 billion, showing steady growth. Analysts expect Zoom's revenue to be $1.16 billion in the current quarter, indicating a 2.32% growth compared to the corresponding quarter of the prior year.



Zoom's forward P/E ratio of 14.17 is lower than the industry average of 31.14, suggesting that the stock may be undervalued. Additionally, Zoom's PEG ratio of 3.15 is lower than the industry average of 2.02, further indicating that the stock might be attractively priced. Despite the recent stock price decline, many analysts maintain a positive outlook on Zoom, with 24 (89%) rating it as a "buy" or "strong buy" (Source: Nasdaq).

Zoom's videoconferencing product has been successful, with many organizations willing to pay for its service despite having access to Microsoft Teams. However, investors may be concerned about competition from Microsoft Teams and other videoconferencing platforms, which could impact Zoom's market share and growth prospects.

In conclusion, Zoom's stock underperformance on Monday can be attributed to a combination of factors, including modest earnings and revenue growth, high investor expectations, and recent profit-taking. Despite the decline, the company's attractive valuation and positive analyst sentiment suggest that there may be opportunities for the stock to rebound if it can deliver on its growth prospects.