This article was written exclusively for Investing.com
Of all the so-called “pandemic winners,” Zoom Video Communications (NASDAQ:) might have had the most dramatic rise. Zoom stock started 2020 below $70. But as the novel coronavirus pandemic forced offices around the world to close and “Zoom” became a verb, stocks soared, gaining more than 700% by mid-October.
Incredibly, during this rally, Zoom’s market capitalization increased by nearly $150 billion. To put that into context, companies like AT&T (NYSE:), Lowe’s Companies (NYSE:) and CVS Health (NYSE:) each have a total market cap that’s less than Zoom added in just nine and a half months.
Almost as unbelievably, the stock has returned nearly all of its gains, with the stock today trading modestly above $100. And while the market clearly pushed ZM stock too high at the end of 2020, it’s fair to wonder if investors let the stock drop too low here in 2022.
Basically, the shares look quite attractive, especially with the company’s plans to expand beyond the basic video conferencing service. There is certainly a big risk here, but investors comfortable with this risk should view ZM as a buying opportunity at current levels.
Zoom stock is getting (sort of) cheap
Admittedly, at $100, ZM stock isn’t quite a safe bet. Compared to the midpoint of the company’s guidance for fiscal year 2023 (which ends in January), shares are trading at more than 28 times adjusted earnings per share forecast for this year. And Zoom’s adjusted numbers don’t take into account stock-based compensation, which is significant: Zoom recorded $477 million in such expenses, which means that even after tax, those expenses increased EPS. adjusted by more than a dollar. Taking this stock-based compensation into account, the forward price/earnings multiple is likely greater than 35x.
That said, this business remains very attractive and should benefit from a high earnings multiple. Even with offices reopening this year, Zoom expects revenue growth of approximately 11% from FY22 levels. billion, is surprisingly nearly 14 times what the company generated four years earlier. Given that demand has been greatly boosted by the pandemic, Zoom’s expectation of increased revenue this year seems like a win.
In the meantime, the company is showing impressive profitability. Even on a GAAP (Generally Accepted Accounting Principles) basis, which includes the expense of issuing stock to employees, Zoom is expected to post operating margins of more than 20% this year. That’s in line with some of the best companies in all of technology. The balance sheet looks rock-solid, with more than $5 billion in cash and marketable securities — a total close to 20% of the company’s market capitalization — and no debt.
It bears repeating: The Zoom action is not a safe bet, and it is far from it. But at the very least, the stock’s revaluation has created much more reasonable expectations for growth ahead.
Zoom is looking to expand
So far, Zoom’s growth has been driven by the video conferencing business. But future growth will likely be driven by new initiatives.
Arguably the most significant of these new initiatives is Zoom’s contact center offering, announced in February. Contact centers are the hub of all customer interactions, whether it’s a traditional phone call, Zoom meeting, chat or text.
Zoom has been trying to enter this realm for some time. Last year, the company announced plans to acquire call center operator Five9 (NASDAQ:) in an all-stock deal. But the drop in ZM stock led Five9 shareholders to reject the offer.
The contact center is a big opportunity for Zoom. Two of the leaders in the center space, Five9 and RingCentral (NYSE:), together have a market capitalization of around $16 billion. These two companies alone are expected to generate over $300 million in net revenue in 2023 – and the space includes many smaller players as well.
The success of contact centers may contribute to Zoom’s earnings growth in the future. The same goes for other additions to the main activity. Zoom Phone had a “strong” performance in the fourth quarter, according to Zoom’s post-earnings conference call. There is a multi-billion dollar market that Zoom can target with this product. Zoom IQ, launched last month, is a “conversational intelligence” tool, which uses artificial intelligence to analyze sales calls and meetings. Other offers are under development.
A broader strategy
Notably, all of these products should theoretically work together to further tie customers, and especially large customers, to the Zoom platform. It’s a version of what’s known as the “flywheel,” which has been a hugely popular talking point in the tech industry for the past two decades. Each product amplifies the value of the overall ecosystem and, no doubt, more products are to come. The strategy adopted here can make Zoom an integral and irreplaceable part of its customers’ workflows, whether in sales or elsewhere.
And at ~35x GAAP earnings, with continued revenue growth and already strong profit margins, Zoom stock is undoubtedly a winner if that happens.
ZM Stock Risks
In this context, there is a good chance that the Zoom action has fallen too low. Indeed, to a certain extent, the market is favorable to this thesis. ZM has held up well since mid-March, at a time when tech names have fallen sharply (the index, which includes Zoom, is down 11% since March 18) and “pandemic winners” have continued to sell.
But there are two obvious risks to this case. The first is that Zoom’s revenue is starting to decline with the return to post-pandemic normalcy. This risk seems potentially exaggerated.
The “new normal” is going to include remote working in one form or another, often in a so-called hybrid model. A number of companies – the most recent being Airbnb (NASDAQ:) – have permanently adopted remote working policies. In the future, video conferencing will be a requirement for most medium to large sized businesses around the world.
The most pressing risk is whether the need for videoconferencing will actually be met by Zoom. The looming giant is Microsoft (NASDAQ:). Almost all of these medium and large companies already have Microsoft Office, which includes Teams for free.
For now, at least, it looks like Zoom has a superior product. Again, his income will be multiplied by ~14 in four years; this could not happen without a competitive advantage. Microsoft has caught up, but it looks like Zoom is still a good head start, especially for external use.
The threat from Microsoft (as well as Cisco and others) is real. But it is also part of the value of the expansion strategy. Microsoft’s advantage, for now, is that Teams can connect so seamlessly to existing Microsoft processes. Zoom can create a similar advantage by expanding the reach of contact centers, gaining share with Zoom Phone, and maintaining its partnership with Slack (now a unit of Salesforce.com).
It’s fair to worry about the competition; indeed, it was for this reason, as well as the valuation, that I personally shorted Zoom stock during its pandemic-fueled rise. That deal didn’t work out, admittedly, in part because Zoom clearly outplayed its competition during the remote work wave.
That wave has subsided, but Zoom’s competitive advantage seems to endure. As long as that’s the case, Zoom stock should be a safe bet for the long term.
Disclosure: As of this writing, Vince Martin has no position in any of the securities mentioned.
Want to find your next big idea? InvestingPro+ gives you the ability to sift through over 135,000 stocks to find the fastest growing or most undervalued stocks in the world, with professional data, tools and insights. Learn more
We wish to thank the author of this article for this amazing content
Zoom Technologies stock suddenly looks cheap | Investing.com
You can view our social media profiles here as well as other related pages herehttps://www.ai-magazine.com/related-pages/