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What happened

Shares of videoconferencing star Zoom Video Communications (NASDAQ: ZM) tumbled 5.5% in early trading on the Nasdaq Tuesday, before clawing their way back to about a 1.5% decline as of 12:15 p.m. ET. The strange thing is, Zoom just beat expectations in its earnings report yesterday.

Heading into its fiscal second quarter of 2024, ended July 31, analysts had forecast that Zoom would earn only $1.05 per share, adjusted for one-time items, on sales of just over $1.1 billion. Zoom nailed the sales target — actually even edged it out a bit — and crushed on earnings, delivering pro forma profits of $1.34 per share.

So what

So why is Zoom stock down today? Well, let’s see here. Sales of $1.14 billion beat expectations, but still rose less than 4% year over year — not great for a growth stock, if that’s how investors still view Zoom post-pandemic. And while Zoom reported $1.34 pro forma, its profits per diluted share as calculated according to generally accepted accounting principles (GAAP) were only $0.59 per share — less than half the headline figure.

On the other hand, though, Zoom’s GAAP earnings did grow mightily in Q2 2024, nearly quadrupling over the $0.15 per share Zoom earned in fiscal Q2 2023. Free cash flow (FCF) at Zoom, too, improved much faster than the sales figure, rising 26% year over year to $289.4 million, which seems pretty impressive.

Now what

For the fiscal third quarter, Zoom told investors it expects to record pro forma profits ranging from $1.07 to $1.09 per share — ahead of analyst expectations. Revenue, however, will range only between $1.115 billion and $1.122 billion in the quarter currently underway — versus an analyst forecast of $1.13 billion. Combined with the weak rate of sales growth in Q2, this may explain why investors seem hesitant to flock to the stock today.

Then again, for the full year, Zoom says investors can expect revenue to range from $4.52 billion to $4.53 billion — ahead of analyst expectations for $4.48 billion. What’s more, Zoom is forecasting earnings well¬≠ ahead of expectations. Full-year fiscal 2024 earnings should be in excess of $4.63 per share, versus Wall Street’s forecast $4.30 per share.

Between the sizable earnings beat in Q2, and the prediction of an even bigger beat for the year, my hunch is that investor worries over slow sales growth at Zoom are overblown. At a current valuation of roughly 17 times free cash flow, and with both GAAP earnings and FCF growing nicely, Zoom stock looks like a buy to me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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