Zoom Video Communications Inc ZM reported third-quarter results that came in better than expected but investors appear to be disappointed based on the 14% selloff.

The Analysts: Rosenblatt Securities analyst Ryan Koontz maintains a Neutral rating on Zoom's stock with a price target lowered from $450 to $435.

Morgan Stanley Meta Marshall maintains at Equal-Weight, price target lifted from $350 to $380.

Needham analyst Richard Valera maintains at Buy, $540 price target.

Morningstar analyst Dan Romanoff raised his fair value estimate from $153 to $176.

KeyBanc Capital Markets Alex Kurtz maintains at Sector Weight.

Quarter Recap: Zoom reported a 367% year-over-year revenue growth at $777.2 million and beat consensus estimates by 12%. EPS of 99 cents was seven cents higher quarter-over-quarter and beat estimates by 24 cents.

Gross margins of 68.2% decreased notably by 1,470 basis points year-over-year and by 400 basis points quarter-over-quarter due to increase usage of the public cloud and offering a free platform to some users.

Management justifies offering a free service as it acts as a substitute for more costly sales and marketing campaigns. As such, Koontz said there's no reason for investors to be concerned with declining margins.

What To Like, Not Like: Zoom bulls have three reasons to be happy after the earnings report, Marshall wrote in a note:

• Zoom added 1,289 customers that contribute more than $100,000 in trailing twelve months (TTM) revenue. Only 12% of customers pay at least $100,000 a year versus 54% that pay at least $1,000 annually.
• Next expansion was 170% in the reported quarter as 19% of total growth came from existing customers.
• Zoom is gaining momentum internationally and Zoom Phone was the fastest-growing product.

On the other hand, the firm notes three takeaways worth monitoring:

• Churn could rise as revenue from customers with 10 or fewer users accounted for 38% of revenue. Small businesses are more likely to undergo churn as the work-from-home realities come to an end.
• Gross margins declines could continue amid continued free usage.
• 3OnZoom remains in beta testing and shouldn't generate any material contribution next year.