Zoom Communications (ZM  ) was 2% higher in postmarket trading, following its better than expected first-quarter results. The company posted $328 million in revenue and $27 million in net profit. Both were significantly higher than analysts' expectations of $202 million and $12 million, respectively. They were also significantly higher than last year's first quarter of $122 million in revenue and $200,000 in net income.

Impressive Results

Due to people working from home and taking classes online, Zoom is in the position of seeing its earnings and revenue accelerate. In the previous quarter, its revenue grew by 78%, and this quarter it increased by 168%. The company is projecting between $495 and $500 million in revenue for the next quarter, and between $1.775 and $1.8 billion for its full fiscal year. This forecast takes into account the potential for some people to return to work and school.

In a sense, Zoom's stock has already priced in this strong performance as it's nearly tripled this year. It's one of the few stocks which was higher during the coronavirus crash due to the increased demand for its product. Therefore, the stock's gains were muted despite its strong results and guidance.

Looking Ahead

By traditional valuation metrics, the stock is overvalued given its market cap of more than $50 billion. It has a four-digit price to earnings ratio and a price to sales ratio of 85. This type of multiple means the stock has to meet lofty expectations to justify investors' bullishness.

The one point of caution in its results is its drop in gross margins from 80% to 68%. This is largely due to the number of free users exploding which is a loss-leader for the company. Its business model is to eventually convert these customers to its paid product. This will be difficult given that many people might be returning back to school or the office in coming months. Additionally, companies like Microsoft (MSFT  ), Google (GOOG  ), and Facebook (FB  ) are determined to own a piece of this market as well. These companies have deep pockets and their own channels to push their product to users as well.

Conclusion

Overall, the company's dominance in this niche is impressive and surprising. "Zooming" has become a verb and part of the culture. It's managed to continue gaining market share and users despite concerns about privacy and ties to the Chinese government. It's also managed to scale up with exponential growth in the use of its product with barely any hiccups. This is a feat that has evaded many other tech upstarts and even established companies. In December, the company had 10 million daily participants, and in April, it had 300 million daily participants.

In the short-term, it's quite likely that video conferencing will take a dip as the coronavirus catalyst recedes. However, in the long-term, this market will continue to grow as online and remote work continue to increase. If Zoom can maintain its dominance, then its stock will do well and validate investors' optimism.