On Tuesday, Goldman Sachs (NYSE:GS) adjusted its outlook on Zoom Video Communications Inc. (NASDAQ:ZM), reducing the price target from $73.00 to $70.00, while sustaining a Neutral rating on the company's shares.
The adjustment comes after Zoom reported first-quarter results that slightly exceeded revenue expectations, with a 1% increase over the consensus, including a 2% beat on Enterprise revenue compared to Goldman Sachs estimates. Operating income and free cash flow (FCF) also surpassed estimates, with a 10% and 58% increase, respectively, against consensus projections.
Zoom's stock experienced a slight dip in after-hours trading, reflecting investor caution. Despite the company's marginal revenue outperformance in the first quarter and a steady FY25 revenue guide, the unchanged forecast suggests a continued uncertain demand environment that may delay a shift to decelerating growth trends.
The report highlighted a decrease in Enterprise Net Retention Rate to 99% from 101% in the previous quarter, along with stagnant Online revenue, indicating ongoing market challenges.
Goldman Sachs noted several positive aspects, including Zoom's progress with larger Contact Center customers, with 90 now spending over $100,000 in annual recurring revenue (ARR). The firm's multi-product strategy appears to be gaining traction, as evidenced by the growth in Zoom Phone to approximately $600 million in ARR.
Additionally, the uptake of Zoom's AI Companion increased to 700,000 accounts, up from 510,000 in the fourth quarter. This growth could potentially enhance the Enterprise Gross Retention Rate.
The investment firm also recognized Zoom's effective execution of its profitable growth strategy, which is reflected in a modest increase to FY25 Operating Income and Earnings Per Share (EPS) forecasts, up 1% and 3%, respectively.
Although the quarter's performance was solid, Goldman Sachs believes the risk-reward balance for Zoom's stock will remain even until further evidence emerges to support an improved growth outlook. Indicators of such an improvement would include a healthier hiring environment, scaling of emerging products like Zoom Phone and Contact Center, and better conversion rates at the top of the sales funnel, along with further reductions in customer churn.
InvestingPro Insights
As Zoom Video Communications (NASDAQ:ZM) navigates through market uncertainties, InvestingPro data shows a company with strong financial health and potential for future growth. With a market capitalization of $19.9 billion and a forward-looking P/E ratio of 25.15, Zoom's valuation reflects its status as a mature yet still expanding tech company. Moreover, the impressive gross profit margin of 76.33% in the last twelve months as of Q1 2025 underscores the company's efficiency in maintaining profitability despite market fluctuations.
InvestingPro Tips for Zoom highlight the company's robust balance sheet, with cash holdings exceeding debt, and liquid assets that cover short-term obligations. These factors, combined with a prediction from analysts that Zoom will remain profitable this year, provide a reassuring signal to investors about the company's financial stability. Additionally, for those interested in a deeper dive, there are 4 more InvestingPro Tips available, which can be accessed by visiting the Zoom section on InvestingPro. To further enrich your investment strategy, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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