Why Zoom Stock Zoomed Today

ZM +13.18%

Key Points

• Zoom stock beat on earnings and beat on sales last night.

• Sales inched higher year over year, but profits -- well, they zoomed!

• 10 stocks we like better than Zoom Communications ›

Zoom Communications (NASDAQ: ZM), the videoconferencing stock that won so much success during the pandemic that it became a verb, is soaring even higher in Tuesday trading. Shares are up 12.7% through 11:40 a.m. ET after beating earnings last night.

Heading into Zoom's report, analysts forecast Zoom to earn $1.44 per share on quarterly sales of $1.21 billion. Zoom actually did $1.23 billion in sales, and its earnings were $1.52 per share.

Image source: Getty Images.

Zoom Q3 earnings

You might be a bit surprised to learn that despite the beat, Zoom actually grew its sales barely 4% year over year in Q3 -- but the earnings news will surprise you even more.

Zoom transformed that modest rise in sales into an astounding 204% increase in earnings per share. Even better than the "$1.52" noted above (which, it turns out, was a pro forma number), Zoom reported earnings as calculated according to generally accepted accounting principles (GAAP) of $2.01 per share.

Management says free cash flow was up as well -- maybe not up triple -- but still, the company generated $629.3 million in cash profit for the quarter, up 30% year over year.

Is Zoom stock a buy?

On guidance, Zoom says its full-year fiscal 2026 sales are trending above $4.85 billion, and pro forma profits should land between $5.95 and $5.97 per share. Management didn't provide GAAP guidance, but it did indicate that free cash flow should be approximately $1.87 billion.

Weighed against Zoom's $26.8 billion market capitalization, this works out to a price-to-free cash flow ratio of just 14.3. And relative to the 30% FCF growth Zoom just reported, I'd say that makes Zoom stock cheap enough to buy.

Should you invest $1,000 in Zoom Communications right now?

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

Why Zoom Stock Zoomed Today was originally published by The Motley Fool