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Deutsche Bank has adjusted its outlook on Zoom Video Communications , Inc. (NASDAQ: NASDAQ:ZM), increasing the price target to $75 from $71, while keeping a hold rating on the stock. The adjustment follows the company's second-quarter fiscal year 2025 results, which showed a slight revenue beat of 1% year-over-year and a significant outperformance in earnings per share due to better-than-expected margins.
Zoom's enterprise segment, accounting for nearly 60% of total revenues, exhibited a growth of 4% year-over-year. The online segment displayed consistent stability, with flat growth for the third consecutive quarter.
The firm's revised revenue expectations are now up by approximately 1-2%, while forecasts for non-GAAP operating income and free cash flow (FCF) are raised by 4-5%, attributed to improved margins.
The updated 12-month price target of $75 is based on a forward valuation to the calendar year 2025 year-end. Zoom's stock is currently trading at 13 times the firm's estimated free cash flow per share for calendar year 2025, with the new price target suggesting a 14 times price to free cash flow multiple for calendar year 2026 estimates.
Despite the positive aspects of the second quarter results and a slight increase in the annual outlook, Deutsche Bank anticipates only a modest improvement in top-line growth. This expected growth is likely to be accompanied by additional margin reinvestment aimed at gaining better traction in the upmarket segment.
In other recent news, Zoom delivered a promising performance in the second quarter of fiscal year 2025, surpassing expectations in several financial areas. The company reported a modest 1% increase in revenue compared to consensus estimates, and an operating margin of 39%, both of which were higher than anticipated. Goldman Sachs has responded to these developments by raising the price target for Zoom from $70 to $72, while maintaining a neutral rating.
Zoom's free cash flow margin was 31%, exceeding the consensus by 300 basis points. The company also reported a record low online churn rate of 2.9%, and customer-related prior period growth showed an uptick to 10% year-over-year. Additionally, Zoom's Contact Center customer base has seen significant growth, indicating progress in its multi-product strategy.
InvestingPro Insights
Zoom Video Communications' recent financial performance has set a positive tone in the market. According to InvestingPro data, Zoom holds an impressive market capitalization of $21.04 billion and a forward P/E ratio of 23.79, indicating investor confidence in its earnings potential. The company's gross profit margin stands strong at 76.05% for the last twelve months as of Q2 2025, reflecting its ability to maintain profitability amidst competitive pressures.
InvestingPro Tips highlight several key strengths for Zoom, including the fact that the company holds more cash than debt on its balance sheet, which provides financial flexibility and reduces risk for investors. Additionally, 26 analysts have revised their earnings upwards for the upcoming period, signaling optimism about Zoom’s future performance. The company's valuation also implies a strong free cash flow yield, which aligns with the growth in non-GAAP operating income and free cash flow projections noted in Deutsche Bank's report. For those interested in deeper analysis, there are 11 additional InvestingPro Tips available, providing a comprehensive view of Zoom's financial health and market position.
With the next earnings date set for November 19, 2024, investors and analysts alike will be keen to see if Zoom can maintain its momentum and possibly exceed market expectations. The current fair value assessments from analysts and InvestingPro stand at $74.5 and $88.85 respectively, suggesting potential upside from the previous close price of $68.04. As the market anticipates Zoom's next move, these insights can help investors make informed decisions.
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