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.

Strong Quarter 'By Any Measure': Zoom reported a strong quarter "by any measure" and management's vision of cross-selling the core video conferencing platform with new products like Phone and Rooms, Valera wrote in a note. implies it can double revenue again within three to four years.

Investors should see an inflection in the Phone business in fiscal 2021 as Zoom markets the standalone benefits of a standalone phone product, the analyst said. OnZoom may be a bit further behind as it's unlikely to contribute meaningfully in fiscal 2022.

'Overvalued' Stock: Zoom boasts product and technology advantages but Romanoff said it isn't strong enough to generate a sustainable moat at this stage in the company's lifecycle.

"While we see some evidence of switching costs, the company is still in the early stages of its life cycle, and we do not yet have enough confidence in its ability to earn excess returns on capital over the next decade to warrant a narrow moat rating," the analyst wrote.

Meanwhile, there are two "controversies" resulting in the stock being "overvalued": how fast will the user base grow and how long/robust growth can continue.

The stock's high valuation implies it can be "punished severely" if it fails to deliver against lofty expectations.

A Look At Guidance: Zoom guided its fiscal fourth-quarter revenue to be between $806 million and $811 million versus the prior consensus estimate of $694 million. Management also lifted its full-year revenue guide from around $2.38 billion to around $2.58 billion and implies elevated gross churn versus historical levels.

Kurtz said expectations for continued elevated churn will result in lower quarterly revenue growth through fiscal 2022 as elevated investments will result in both margin and EPS compression.

ZM Price Action: Shares of Zoom were trading lower by around 14% at $415.30.