01 December 2020

Investors Unimpressed by Zoom’s Blowout Quarter

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What’s happening: Shares of Zoom Video Communications Inc fell in extended trading on Monday despite the video communications firm reporting a blowout quarter.

What happened: The covid-19 pandemic resulted in the company achieving remarkable growth amid learn- and work-from-home trends.

Shares of Zoom, which have risen sevenfold this year, moved lower in after-hours trading on Monday, despite the San Jose, California-based company reporting a whopping 1,000% growth in earnings.

How were the results: The cloud-based video platform reported a massive surge in sales and earnings for the latest quarter, with both metrics surpassing consensus estimates.

  • Sales climbed 366.5% to $777.20 million, coming in ahead of market expectations of $693.95 million.
  • Sales climbed 366.5% to $777.20 million, coming in ahead of market expectations of $693.95 million.

Why it matters: Zoom’s stock has been mirroring the performance of the pandemic economy, with its shares rising amid lockdowns and declining on any positive news around covid-19 vaccines.

The company continued to add more customers during the pandemic most people working remotely and children attending classes online. Zoom’s customer base stood at a healthy 433,700 at the end of the latest quarter, representing a 485% increase over the year-ago quarter.

Investors remained concerned, however, about the company’s margins, which shrank to an adjusted gross margin of 68.2%, from 82.9% in the same quarter last year. The adjusted gross margin also represented a contraction from the 72.3% reported last quarter and came in much below the analyst estimates of 71.8%.

Management attributed the margin pressure to costs related to cloud services and a rising number of non-paying users, while saying that gross margins could remain under pressure heading into 2021.

Investors remained on the sidelines even as Zoom issued strong revenue guidance for the current quarter, as the numbers signalled a deceleration in growth, raising concerns over the end of the company’s pandemic-driven boom. Management projected revenues between $806 million and $811 million for the current quarter, representing 146% growth at the midpoint.

The company also guided to earnings between 77 cents and 79 cents a share, versus analyst expectations of 66 cents per share.

What to watch: Investors will monitor the company’s performance as covid-19 vaccines are launched and the global economy reopens. Despite this, the WFH (work from home) trend is unlikely to reverse anytime soon, benefiting Zoom. 

The Markets Today

     

US stocks will be in focus today ahead of various economic reports due for release during the day.

Context: Although US stocks closed lower on Monday, expectations of a strong economic rebound helped the Dow Jones index record its best month since January 1987.

Details: The sharp gains in share prices through November followed a decline during October due to a record surge in coronavirus cases and uncertainties around the US Presidential election.

Equities rose steadily after the election drama subsided, with markets now expecting a smooth transition to President-elect Joe Biden.

Along with easing worries over political uncertainty, investors were encouraged by positive announcements by various pharma companies on the progress of their covid-19 vaccines.

Moderna joined Pfizer to issue an upbeat update on its vaccine, with plans of filing for an emergency authorisation of its vaccine in the US and Europe. The company’s stock jumped more than 20% following the announcement.

An update from the US Health Secretary provided some support to the markets on Monday as Alex Azar projected the availability of the first two covid-19 vaccines before Christmas.

The Dow Jones fell 0.9% to close at 29,638.64 on Monday. Despite this setback, the blue-chip  index posted 12% gains for November.  The S&P 500 index slipped 0.5% to 3,621.63, while the tech-laden Nasdaq 100 declined 0.1% to 12,198.74.

What to watch: Markets await a basket of economic reports from the US, including manufacturing PMI, construction spending and ISM manufacturing PMI. The IHS/Markit manufacturing PMI is expected to climb to 56.7 in November, from 53.4 in October, while the ISM manufacturing PMI is likely to decline to 58 in November, from 59.3 in October. Construction spending is projected to rise 0.8% in October. Investors will also keep an eye on Fed Chairman Jerome Powell’s testimony.

Covid-19 continues to remain a major concern for markets, with total cases in the US crossing 13.5 million.

Other Markets: European trading indices closed lower on Monday, with the FTSE 100, German DAX 30 and French 40 down by 1.59%, 0.33% and 1.42%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Germany's unemployment rate and manufacturing PMI, UK’s nationwide house price index and manufacturing PMI, Spain’s manufacturing PMI and vehicle sales, Italy’s manufacturing PMI and gross domestic product, France’s manufacturing PMI and new car registrations, Eurozone’s manufacturing PMI and consumer prices, Mexico’s manufacturing confidence index and manufacturing PMI, Brazil’s manufacturing PMI and balance of trade, Canada’s GDP and manufacturing PMI as well as the US Redbook index and API’s crude oil stocks.

 

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