How Can Zoom Grow?

In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:

• Whether AI and expanded offerings can create a next act and growth pillar for Zoom.
• Why Lowe's and Home Depot continue to hold up even as home improvement projects dry up.
• The early signs that Target's focus on loyalty and value are getting customers back in the stores just in time for back-to-school shopping.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 22, 2024.

Dylan Lewis: Target's outlook is a bit off-target. Motley Fool Money starts now. I'm Dylan Lewis and I'm joining over the airwaves by Motley Fool Analyst Jason Moser. Jason, thanks for joining me.

Jason Moser: Hey, Dylan. How's it going?

Dylan Lewis: It's good. I'm back from Podcast Movement. We have a week full of earnings to catch up on, which is really, a podcast host dream, because there's no shortage of things for us to discuss today.

Jason Moser: An abundance of content of options is always a nice problem to have.

Dylan Lewis: Yeah, and some big moves, which I think is always fun to discuss. Why don't we kick off with Zoom?

Jason Moser: Sure.

Dylan Lewis: Up 15% this week following the company's earnings release. Top and bottom line came in slightly ahead of expectations. It seems like part of that was demand for the company's AI tools.

Jason Moser: I think with Zoom, the big question a lot of us have had over the last few years is we know how effective and useful the platform is, but the big question is really, how are they going to be able to grow beyond this massive enterprise presence and direct consumer presence that they already have? They have a very good service. But at the end of the day, video conferencing itself, it's basically a one-trick pony. There are other options out there, and it's not exactly terribly specialized. But again, I think Zoom has, to my mind, the superior platform of all of them, and so what we're seeing is efforts from management to expand the platform and the services that they offer. They're doing things like that the platformization of Zoom workplace, becoming that place where you go get all of your work done, introducing things like Zoom Docs, which ultimately is helping employees cobble together all of the stuff that's going on in these video conferences and summarizing them into actionable insights and documents that can help monitor the workflow, so to speak, and then to your point there, they continue to invest in AI all along the way. AI is the fuel.

It's what's working behind the scenes to really help all of these developments. It's adding more functionality in utility to Zoom's platform. I think we're starting to see signs that we understand how they can grow. The big question is going to be, will it actually work? It was absolutely, I think, a respectable quarter revenue of just over $1.1 billion. It was up only 2% from a year ago, but that's better than down 2% Dylan. It was a little bit higher than the expectations that management set. Enterprise revenue grew 4% from a year ago, that represents 59% of total revenue now versus 58% from a year ago. Then I thought what was encouraging. They mentioned on McCauley online average monthly churn came in at 2.9%. That's down from 3.2%. In the second quarter of fiscal 24, and that's the lowest rate that they've ever reported, and so for that online segment, that direct to consumer segment. That's really encouraging to see that folks are sticking around in seeing the utility in the platform.

Dylan Lewis: When we look back at companies that have had, what I will call a useful product, a large customer base, but have been looking for that next, that second act, that thing that expands them out beyond their current monetizable offering. There are plenty of examples of that working out, and there are plenty of examples of that not working out. I'm curious, so far on the user side, it's felt like so much of the AI stuff that we've been seeing, and some of these next offerings have been baked into this experience that we're already really recording the show on. We're on Zoom, we're within the boxes here. Do you think it's going to live within this, or are you looking for something and maybe something that the market would need to be excited about that looks and feels a little different than traditional video conferencing to really give this company a shot in the arm?

Jason Moser: Yeah, I think that's a good question. I think it's going to need to be something that expands beyond just our traditional view of just basic video conferencing. The challenge is going to be making that seamless. It's doing more with the technology that they have. Remember, not all that long ago, they made the effort to acquire Five9, the contact center business. They were looking to build out this contact center side of the business with this acquisition of Five9. That acquisition we know now didn't go through. But I thought, what was need to see on call, they really are building out this contact center side of their business, regardless of the acquisition not going through. They're still going full speed ahead on trying to build out that capability, that functionality, which makes a lot of sense. When you see the benefits in that. It does make a lot of sense.

They made a small acquisition of a company called Workvivo, just late last year. Ultimately, this is an employee communication and engagement platform. Rather than focused on like your customers, or whatnot, this is an internal type of mechanism that helps employees within the organization stay up to speed with what's going on. They're seeing some green shoots there. They're seeing some promise there. I think the challenge for them is going to be trying to make it as seamless as possible while expanding that opportunity into those other capabilities, those functionalities like the contact center, like employee engagement, whatnot.

Dylan Lewis: I'm curious. At this point, Zoom holds, I think the wildest round trip I have ever seen when it comes to a company stock chart. Shares still slightly down for the year, essentially flat since the company came public in about 2019, after that 600 or 650% rise during the pandemic with the initiatives that the company has going on right now and where the company currently trades, is this interesting to you at all? Or if not, is there anything that you could say, I would want to see this before it becomes interesting?

Jason Moser: Well, it is interesting in the sense, so I recommended Zoom and our augmented reality and bond service several years ago. Yeah, it's been a wild ride to say the least. I think from a evaluation perspective, I like the business. I like what I think they offer a great service, and it's encouraging to see leadership continuing to try to innovate and bring new capabilities to the platform. For me, that's very interesting, and I think when you couple that with the valuation today, and again, remember, this is all about from today looking forward, what can we expect? Is this a good opportunity today? Well, their outlook right now for the full year, they're looking at earnings per share of around $5.30, and that puts this stock today at around 13 times full year projection. That is not expensive for an enterprise software type business like this. This is a software business, one that in theory should be able to enjoy robust margins.

Their long term gross margin dog is 80%, and they're right there near it. That to me, is exciting when you look at that valuation. I think the one thing I would keep an eye on and this is just something I noticed in McCauley, but it's something at least to pay attention to. The trailing 12 month net dollar expansion rate for their enterprise customers in the quarter came in at 98%. Typically, I'd like to see that better than 100%. That was versus 109% from a year ago. Given that their explicit strategy is to try to continue expanding the relationship with these enterprise customers, they're only going to be able to sign so many enterprise customers, so the key is to be able to expand those relationships. That's the thing I would keep an eye on. Again, this is just one quarter, but it's definitely a number to follow on the coming quarters.

Dylan Lewis: Over at Lowe's, and in the home improvement market, the struggles continue. In the company's earnings report this week, management revised full year guidance and comps down from original forecasts. Jason, maybe this one not all that surprising given what we saw from Home Depot earlier this earning season?

Jason Moser: Not surprising at all to me, at least. I think Home Depot and Lowe's are very much like a Mastercard and Visa. You just just know what you're going to get with them, and they typically mirror each other for the most part, and in the good times of the bad. Now, this has not been a bad year for Lowe's considering the macro backdrop right there. They're under-performing the market a little bit. But again, given that macro backdrop, the fact that the shares are actually up year to date, I think is pretty encouraging. The numbers didn't inspire a ton of confidence, at least in the near term, revenue of $23.6 billion was down modestly from a year ago.

Comp sales down just a little bit over 5%. They did see encouraging signs in the pro-sales business, and that's something that Home Depot has done very where they've really executed on that pro side. It's good to see Lowe's trying to capture that as well. They saw mid single digit positive comp growth there. Then online sales, 2.9% growth, and they saw a better conversion rates and continued to expand the same day delivery. They're expanding with more delivery partners. Now I think I saw on McCauley, they were incorporating Uber Eats into their network as well, so it's funny when you see DoorDash and Uber Eats delivering you your Lowe's, but I think that speaks to just the the mobile nature of our economy these days. They are witnessing continued soft demand on the do at your soft side. They do see a little strength they're on the pro side to offset that. But I think with Lowe's, you want to look at the three core drivers of this business, which make me wonder if we're not looking at a little bit of a coiled spring at some point. Home prices continue to appreciate modestly, which is increasing levels of home equity. We're at a position now where disposable personal income is actually growing faster than inflation, and so that's something that could play into their numbers positively. Then obviously, the aging housing stock just means there are going to be a lot of projects on tap here as the consumer continues to get a little bit stronger and as the housing market continues to recover, so I think there's reason to be optimistic.

Dylan Lewis: It was interesting management noted this quarter in the call. I think 90% of Lowe's customers are homeowners and most have fixed 30 year mortgages of less than 4%. Jason, I feel like until rates come down, we are going to be staring at a very similar situation quarter to quarter. There is going to be this waiting game that happens, particularly for some of those more expensive projects that might need financing. As you noted, I'm impressed that the company and Home Depot too have held up as well as they have given the headwinds that they're facing. It's a slightly different story when you look at a company that is related to this industry, but not quite in the robust home improvement space. Trex, this is a business that we would associate with home improvement, but they're much more narrow in their scope. They're down 20% year to date, and there have been some very sharp sell offs to their recent results. What do you make of the divergent market experience for these companies given the headwinds are very similar?

Jason Moser: Well, it's funny. I feel like I had so much to draw on here, just from personal experience. My family, we are one of those families with a 30 year fixed mortgage at absurdly low rate. I think it's 3% now and it's very difficult to rationalize giving that up any time soon, just given the cost of capital today. I think that's the way a lot of folks are feeling. Definitely the interest rate environment is going to play into that. The nice thing about home ownership and even from the rental side, housing is a necessity, it's not something that's going to go away. It can be cyclical. It can have flow, but those projects eventually are going to need to be done. It's interesting when you mentioned Trex, and we, several years ago, had our deck replaced at our house with a Fool on Trex deck.

I'll tell you, it is unbelievable. This is a great product, and it's durable. It's easy to clean. It's long-lasting. It really does up the value of your home. The flip side of that coin though. It's not cheap. It is expensive to put in a Trex's deck, no matter the size, and so I can understand why people would be putting those types of projects on the back burner. If we see home prices continue to appreciate, we continue to see equity build, and we can see that interest rate environment start to come down. That's going to make accessing that capital a little bit easier through things like home equity loans and lines of credit. I suspect when we see that tide turn, we'll see Trex's numbers improve a little bit, but you're right. Trex is absolutely more niche, and I think a much easier project to put on the back burner than some of your typical DIY projects that Lowe's and Home Depot would benefit from.

Dylan Lewis: Rounding us out with retail. Some signs of life from Target this week, retailer had shares up 7% following earnings that were ahead of expectations and on the one hand, company sales return to growth, on the other, comps guidance still not all that inspiring.

Jason Moser: No. This wasn't a Walmart-level quarter, but it was a decent quarter, and it definitely points to things headed in the right direction for this company, I think. The consumer continues to focus on value, and that's an area where Target can really shine. Looking at the numbers, the revenue was up 2.7% to $25.5 billion total. Comp is up 2%. Then they saw adjusted earnings-per-share growth of 40% versus a year ago. All of this was fueled by traffic growth of 3% that helped offset a modest decline in ticket size, which is not surprising at all. Then we saw digital comps grow 8.7% with strength and things like Same Day services, Drive Up, the Target Circle 360. One of the encouraging things too about this business, and I didn't realize this was as large apart, but it makes sense is the Target Circle program, and this is essentially like their loyalty program, like you'd go into a grocery store, you have your Safeway or your Giant card or whatever it may be. But the Target Circle program is really gaining traction. It's free to sign up. They have now over 100 million members, and this is one of those loyalty programs that drives engagement, that drives repeat visits. Then it also gives them the opportunity to pull an Amazon, and they had what's called Target Circle Week, where they can really try to showcase this program and the savings and the deals that consumers can get. They saw the highest digital traffic of the year so far with their Target Circle Week this year. Again, I didn't like the world on fire, but definitely it feels like these guys are heading the right direction.

Dylan Lewis: Heading into this quarter, I feel like some of the main focuses for management were, that loyalty program you just mentioned, and also the focus on value and really looking to get prices down. I think they wound up reducing prices on, like 5,000 different everyday items, things like milk, things like diapers, just to be able to get customers back into the stores. It seems like that's starting to show up a little bit in some of the traffic numbers that we're seeing from them and the trends that we're seeing from them.

Jason Moser: I think that's right. As they noted, they're in the penny business, these retailers are not operating on huge margins. When you get down to that bottom line, your big retailers are operating on very razor thin margins, and they know that they have to compete on cost and that's going to be just the way that is. I thought it was encouraging to see. Again, they are witnessing some top line challenges. Continuing to grow that traffic is tough, and we saw the traffic growth offset by a little bit of a shrinking ticket size there. But they've done a very good job on the operating side, focusing on the costs of the business.

While they're witnessing some challenges on that top line, they are still seeing a little bit of an acceleration on the bottom line. They actually raised adjusted earnings guidance for the year up to a range of $9-$9.70. That was up from a previous range of 860-960. You look at this business at the midpoint of that guidance and put shares around 17 times full year estimates. That doesn't seem unreasonable for a business as well established as Target. They're always going to have to compete on cost, and they're always going to have to compete with the Walmarts and the Amazons of the world. But the good news is it seems like they're doing the right things, beyond just being that physical retailer, introducing things like the circle program, and focusing on e-commerce and drive up, delivery, whatnot. Again, a very difficult market in which to compete, but they are given it they're all.

Dylan Lewis: Certainly, the back to school season, another opportunity for the company to reengage with some of those shoppers that maybe aren't making quite as many trips to the store. Jason, you have a couple kids heading off to college this season. I'm guessing you've had a couple of trips to Target recently.

Jason Moser: I was going to say Target, yeah, we just moved our older daughter back to college for her sophomore year, and our younger daughter is headed off for her freshman year, and Target has definitely gotten a few of our dollars of this back to school season. For those of you who think back to school season is just up through high school, you're wrong. If you got kids going to college, I dare I say you'll probably spend a little bit more at Target for those college years than you ever would those elementary and high school years.

Dylan Lewis: Have you been in the stores and had your boots on the ground there? Any impressions just from the way that they're positioning some of the back to school stuff or the dorm stuff or anything like that?

Jason Moser: It's always when you go in there, they always just seem to be very thoughtful about having that type of merchandise front and center so it's obvious. They're big stores, and you can get a little bit lost in trying to find what you're trying to find. But they do seem to really capitalize on seasons like back to school. Then they mentioned the holiday season as well. That's just around the quarter and we're going to start seeing a lot of Halloween stuff. They just always make the in store experience rather pleasant. Maybe that's a function of the fact that they're not as big as Walmart and probably really not as busy as Walmart. Stores are maybe a little bit less crowded in some cases. But generally speaking, they do seem to really be operating with some real rigor in making sure that that retail experience for the customer is always a consistent and a good one.

Dylan Lewis: We'll see if management notes a Moser bump in next quarters management earnings call. Jason, thanks for joining me today.

Jason Moser: Thank you.

Dylan Lewis: As we wrap up here, listeners, just a quick program. No second segment for us today, but we'll be back with our regular shows next week. As always people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thank you for listening. We'll be back tomorrow.