Because Zoom Video Communications stocks fell on Tuesday

What happened

Actions of Zoom video communications (NASDAQ: ZM) it went down early Tuesday after the company released one of the most impressive quarterly reports you’ve ever seen. Even with a strong exit and raised guidance, it wasn’t enough to keep this market treasure from turning back today. Investors are likely worried about the stock’s valuation and traders are looking to register profits. As of Tuesday’s 10:30 am EST, Zoom stock is down 13%.

So

Zoom’s fiscal calendar doesn’t align with traditional calendars; has just reported results for its fiscal third quarter of 2021, which spans the beginning of August through the end of October. Over this period of time, the company’s revenues increased a staggering 367% year-over-year to $ 777 million. Growth on this scale broke expectations and helped record net income of $ 198 million, up from just $ 2 million in the same quarter last year.

With the COVID-19 pandemic affecting many aspects of daily life, Zoom has become a ubiquitous tool that helps many people meet their educational, work and social needs. But this company may have already reached the pinnacle of its pandemic-fueled growth. For the next fiscal fourth quarter, revenue is expected to range from $ 806 million to $ 811 million, which represents a growth of 329% year-over-year by half.

Now what

Even with today’s price drop, Zoom’s shares are still up more than 500% year to date. For momentum traders, these outsized gains are likely too tempting to pass up, considering the company’s growth rate is expected to begin to moderate in the coming quarters. Part of today’s decline is undoubtedly attributable to retailers looking for the next big thing.

Even for long-term investors, the small drop in Zoom’s share price can be appreciated considering its current valuation. There are several ways to measure this, but for growth stocks like Zoom, a commonly used metric is the price / sales ratio. The company’s current market capitalization is nearly $ 119 billion compared to fiscal 2021 full-year guided revenue of nearly $ 2.6 billion. This is a forward price / sale ratio of over 45, extremely expensive.

That said, winning companies have a tendency to find new ways to create shareholder value over time. Valuation metrics such as price / sales are unable to measure these opportunities. This requires insight from individual investors like you and me as we search for companies. For this reason, I would be reluctant to count Zoom out stock just for valuation issues.