Why Zoom shares plunged on Tuesday

The video conference company's expansion is decelerating as life begins to normalise.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened?

Shares of Zoom Video Communications Inc (NASDAQ: ZM) fell 14.7% on Tuesday after the cloud communications leader's slowing growth troubled analysts and investors.

So what?

Zoom's revenue jumped 35% year over year to $1.05 billion in its fiscal 2022 third quarter. That marked a significant deceleration from the 54% growth the video-chat company experienced in the second quarter and the staggering 367% growth it delivered in the third quarter of 2021. 

To offset the slowdown, Zoom has placed a point of emphasis on expanding its relationships with larger companies, with tools such as its Zoom Rooms video conference room solutions that make it easier for onsite and offsite employees to communicate.

Zoom had 2,507 customers contributing more than $100,000 in trailing 12-month revenue at the end of the third quarter, up 94% from the same period a year ago. These dynamics can also be seen in its net dollar expansion rate in customers with more than 10 employees, which checked in above 130% for the 11th straight quarter.

All told, Zoom's adjusted net income increased 14% to $338.4 million, or $1.11 per share.

Now what?

Management expects fourth-quarter revenue of roughly $1.05 billion. That would represent a further deceleration in revenue growth, to 19%. The company also guided for operating income and adjusted per-share profits of approximately $362 million and $1.07.

Multiple investment firms cut their price targets for Zoom's stock following its third-quarter earnings release and Q4 guidance. For one, Evercore ISI analyst Peter Levine reduced his share price forecast from $255 to $235 on concerns that Zoom's growth investments will weigh on its profit margins in the coming year. For another, Deutsche Bank analyst Matthew Nikam slashed his stock price estimate from $350 to $280, citing similar concerns.

"While we're positive on Zoom's strategic initiatives and investments in key growth areas, we find it tougher to like a stock with more sharply decelerating growth and incremental pressure on profitability," Nikam said. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Zoom Video Communications. The Motley Fool Australia has recommended Zoom Video Communications. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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