Why Zoom Video stock is up more than 10% this week

stock zoom video (ZM 0.45%) It’s up 10% this week, according to data from S&P Global Market Intelligence. The video conferencing software provider posted better-than-expected revenue and revenue growth in the fourth quarter. The pandemic winner is still 87.5% off its all-time high but is improving its business fundamentals.

Here’s why Zoom stock soared this week.

Exceeded sales and profit expectations

In the fourth quarter of last fiscal year, Zoom had revenue of $1.15 billion and adjusted earnings per share (EPS) of $1.22. Both figures slightly beat analysts’ expectations of $1.13 billion in revenue and $1.15 in adjusted EPS. Double beats are an easy way to pop stocks after earnings. That’s why Zoom Video is here this week.

Looking deeper into the report, Zoom had a rather strong financial performance this quarter. Remaining performance obligations, an indicator of future revenue growth, increased 4% year over year to $3.56 billion. Although it’s not lightning-quick growth, it shows that enterprise customers are still using Zoom’s products years after the pandemic lockdowns. While the company’s revenue increased 5% in the quarter, its monthly churn rate decreased from 3.4% a year ago to 3% last quarter. These are all positive signs for Zoom’s business momentum.

This fiscal year, Zoom had revenue of $4.6 billion and free cash flow of just under $1.5 billion. It also just approved a $1.5 billion stock repurchase program that will return a huge pile of cash to investors.

What will this fiscal year look like?

Zoom likes to promote free cash flow generation. The upper limit of guidance for fiscal 2025 (current fiscal year) is expected to be $1.48 billion. But that doesn’t include the $1.1 billion it spends on stock-based compensation each year. These are real costs. Using generally accepted accounting principles (GAAP) earnings, Zoom’s trailing price-to-earnings (P/E) ratio is 35.

Earnings ratios that are higher than the market average typically apply to the fastest-growing companies. Zoom is barely growing its revenue. Despite its big claims about cash flow generation, Zoom stock appears overvalued at these levels, unless it thinks it can accelerate revenue growth again. Investors would be wise to avoid buying stocks right now, even though they are down nearly 90% from their all-time highs.