Is Zoom Video Communications, Inc NASDAQ:ZM Trading At A 30% Discount?
6 min readThe company was incorporated in 2011 and is headquartered in San Jose, California. Despite an upgrade in financial estimates, the stock’s current valuation, trading at 14.5x this year’s earnings, does not present a compelling investment case. With an outlook of mid-single digits CAGR for revenue and low-single digits for EPS, coupled with the prevailing risks, the risk/reward profile appears unfavorable.
Using the $12.2 billion estimate for 2027 revenues, I would expect ZM to trade at around 17.3x sales by the end of 2027. That represents 135% potential upside in the next 6 years, for an average compounded return of 15%. That would arguably be a stellar return – remember that ZM is highly profitable with a strong balance sheet. Valuation aside, ZM should be considered one of the lower-risk stocks forex vs stocks in the market today. Zoom shares have lost over 60% of their value in the past six months as part of a broader tech sell-off in response to rising interest rates and inflation. Revenue and earnings growth remain strong — analysts are forecasting revenue and earnings per share to grow by 54% and 46% year over year up to $4.1 billion and $4.87 per share in fiscal year 2022, respectively.
- Whereas the company fundamentally definitely had potential, I saw too many negatives and headwinds for it to get past to consider this a solid investment.
- Our research reveals that these estimate alterations are directly linked with the stock price performance in the near future.
- Consensus estimates appear reasonable, if not somewhat optimistic.
- The Zacks Industry Rank gauges the strength of our industry groups by measuring the average Zacks Rank of the individual stocks within the groups.
- Cash flows also grew strongly, with FCF up 66% YoY to $453 million, bringing the YTD total to a significant $1.14 billion, representing an FCF margin of 34%.
The number of full workdays from home increased from just 6% pre-pandemic to 50% in the midst of the pandemic and has since retracted to 28% since early 2023, still significantly above the pre-pandemic level. This is what has so far allowed Zoom to avoid reporting negative growth. Both consumers and https://bigbostrade.com/ enterprises continue to see value in the company’s offering as remote working remains popular. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.
However, this does not mean that crucial issues have entirely disappeared. Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing. Also, Zoom Video has forged new deals in the enterprise market, such as one with software maker ServiceNow (NOW). In July 2021, Zoom Video and Five9 (FIVN), which automates call center services, announced a deal to merge. Rather than increase revenue, Zoom Video expects gen AI tools to retain and add customers. As of Aug. 23, 2021, Zoom had 240,744,533 outstanding shares of Class A common stock and 56,383,369 outstanding shares of Class B common stock.
Zoom Video Communications, Inc. key financial stats and ratios
In light of these considerations, the recommendation remains a sell, with the expectation that Zoom is likely to underperform over the next 12 months. Investors are advised to approach the stock cautiously, considering alternative opportunities in the market, especially given the current high-interest rate environment. Zoom’s financials remain strong, but I think the company needs to improve future growth prospects to justify trading at current valuation multiples. With revenue and earnings growth expected to pull back in the years ahead, I wouldn’t be surprised to see growth-oriented investors exit their positions in Zoom stock.
Strong Investment Potential
Compared to the current share price of US$69.2, the company appears quite good value at a 30% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out. Financially, Zoom has outperformed expectations in 2023, showing resilience in revenue and achieving better-than-expected growth.
Price Target and Rating
Zoom Video’s valuation is too negative given the catalysts ahead for the stock in the second half of 2021, Marshall said in a note. Five9 investors have been told by an influential advisory firm to reject Zoom’s acquisition offer. After Five9 investors are warned against Zoom’s planned acquisition of the company, The US Department of Justice raises national security concerns over the deal. After receiving backlash from shareholders and regulators, Zoom and Five9 mutually agree to officially call off their $14.7 billion acquisition.
More specifically, Zoom holds about 30% of its market cap as just cash! Inevitably, if one invests in a business where 30% of its market cap is made up of cash, that provides a whopping fat margin of safety. Whether for work, education, or social gatherings, Zoom provides a user-friendly interface for hosting and participating in video calls, making it easy for individuals and groups to communicate and collaborate remotely. The platform has become one of the main go-to solutions for virtual meetings. Rather, for investors, what truly matters is whether the stock offers investors a compelling risk-reward.
MacRumors attracts a broad audience of both consumers and professionals interested in the latest technologies and products. We also boast an active community focused on purchasing decisions and technical aspects of the iPhone, iPad, Mac, and other Apple platforms. Later in the spring, the Zoom app will add support for sharing 3D files, with the files able to “come to life” on the Vision Pro. Team Chat integration is coming as well, and users will eventually be able to pin up to five Zoom participants anywhere in their physical space. Be sure to use Zacks.com to monitor all these stock-influencing metrics, and more, throughout the forthcoming trading sessions.
Even if I maintain my 15x fair value multiple, the slightly higher EPS expectations only allow for a minor target price increase to $73 per share, based on my FY25 EPS projection. This leaves pretty much no upside potential over the next 12+ months, which is why I reconfirm my sell rating on Zoom, despite some positive developments and outlook upgrades. For Q4, management has guided revenue to be in the range of $1.125 billion to $1.13 billion, up just 1% at the midpoint of the range, indicating that growth continues to slow down. However, management has been very conservative in its guidance over recent quarters, so these estimates probably have some upside. Management further guides for an operating margin of around 36.5%, up 30 basis points YoY. Growth so far in 2023 had turned out much better than what management had guided for at the start of the year when it had guided growth of just 1%.
The U.S. government has been increasing its scrutiny of Zoom on several fronts. In 2020, the United States charged a China-based Zoom executive with conspiring to disrupt videoconference commemorations of the 1989 Tiananmen Square democracy protests. Zoom is also the focus of several ongoing federal investigations related to its dealings with Beijing, according to the Journal. New Rank-Based ScoringMarketRank™ is calculated by averaging available category scores (with extra weight given to analysis and valuation), then ranking the company’s weighted average against that of other companies. The firm has accumulated Tesla shares in all four sessions following the company’s fourth-quarter double miss.
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And this is reflected in its FY23 results and FY24 outlook with growth of just 7% and 1%, respectively. The company seems to have entered a mature stage in which growth is expected to remain in the mid-single digits and management should focus on profitability and its shareholders. Yet, the company reported SBC expenses of $1.3 billion in FY23, resulting in it only barely making a GAAP profit. It has been a while since I last covered Zoom, the company behind one of the world’s largest videoconferencing platforms, here on Seeking Alpha.
The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today’s value at a cost of equity of 8.0%. Clearly, the company is operating in a challenging environment and struggling to grow revenue and earnings. Whereas we have seen many technology stock prices skyrocket so far in 2023, Zoom stock is up just 7% YTD. Furthermore, shares are up just 2.5% since I last covered these in April, underperforming the SP500 index significantly as this one is up 14.5% over the same period.