Actions of Focus on video communications (NASDAQ: ZM) fell early Tuesday after the company released one of the most impressive quarterly reports you’ve ever seen. Even with a strong exit and high advice, that wasn’t enough to keep this market darling from falling back today. Investors are likely worried about the stock’s valuation and traders are looking to make profits. As of 10:30 a.m. EST Tuesday, Zoom stock was down 13%.
Zoom’s fiscal calendar does not match traditional calendars; it just released results for the third fiscal quarter of 2021, covering the start of August through the end of October. For this period, the company’s revenue grew 367% year-over-year to reach $ 777 million. Growth on this scale shattered expectations and helped it record a net profit of $ 198 million, down from just $ 2 million in the same quarter last year.
With the COVID-19 pandemic affecting many aspects of daily life, Zoom has become a ubiquitous tool that helps many people meet their educational, professional and social needs. But this company may have already reached the peak of its pandemic-fueled growth. For the coming fourth fiscal quarter, it forecasts revenue of $ 806 million to $ 811 million, up 329% year-over-year at the midpoint.
Even with today’s price drop, Zoom stock is still up over 500% since the start of the year. For momentum traders, these outsized gains are probably far too appealing to ignore, given that the company’s growth rate is expected to start to moderate over the next few quarters. Part of today’s decline is undoubtedly attributable to those selling in search of the next big thing.
Even for long-term investors, one can appreciate the slight drop in the Zoom share price given its current valuation. There are different ways to measure it, but for growth stocks like Zoom, a commonly used metric is price / sales. The company’s current market capitalization is nearly $ 119 billion, compared to guided revenue for fiscal 2021 of nearly $ 2.6 billion. That’s a futures price / sales ratio of over 45 – extremely expensive.
That said, winning companies tend to find new ways to create shareholder value over time. Valuation metrics like price / sales ratio are unable to measure these opportunities. It requires the vision of individual investors like you and me as we search for companies. For this reason, I would be reluctant to count Zoom out stock on valuation issues alone.