ZOOM: The King of Video Conferencing

Zoom Video Communications (NASDAQ:ZM) was one of the companies that benefitted most from the economic upheavals that accompanied the early days of 2020-21 lockdowns. Becoming a household name practically overnight, Zoom saw its share prices skyrocket.

The stock eventually reached a high of $568 in October of 2020 but has fallen steadily ever since as reopening and the end of remote work arrangements took their toll on the company. So, is Zoom a Buy, Sell or Hold now?

Slower Growth, After Massive Increases

Although Zoom is long past the enormous growth it achieved in 2020 and 2021, the company has maintained modest positive momentum. In the most recent quarter, for example, Zoom reported $1.105 billion in revenue, up 3 percent from the same period last year.

It’s worth noting that Zoom’s largest growth driver today is by far its enterprise business. While overall revenues grew 3 percent, enterprise revenue grew by 13 percent year-over-year. Enterprise revenue also accounted for well over half of all revenues.

And though revenues have continued to grow, earnings have been far more negative over the last year. GAAP earnings per share in the most recent quarter amounted to just $0.05, compared with $0.37 a year earlier. On a non-GAAP basis, earnings totaled $1.16 per share, slightly higher than the year-ago period.

One of Zoom’s greatest strengths is its balance sheet. The company currently holds $1.029 billion in cash and equivalents and another $4.57 billion in marketable securities.

In total, Zoom’s assets amount to $8.54 billion. With liabilities of just $2.01 billion, this puts Zoom on extremely sound financial footing. Zoom also has the advantage of carrying no long-term debt.

Zoom Market Share Is Stunning

While video conferencing is becoming an increasingly large and lucrative business, Zoom’s nearly ubiquitous use during 2020-21 has left it with a halo effect: a massive competitive advantage.

Today, Zoom commands a 55.4 percent share of the video conferencing market. The next closest competitor, Microsoft Teams, holds just 20.9 percent of this market.

Source: Pixabay

This does not mean, however, that Zoom is immune from competitive pressures. Other platforms, including Google Meet and even Facebook Messenger, have moved in on Zoom’s non-enterprise business.

Zoom competes directly with some of the largest tech companies in the world, though its dominance in the video conferencing space remains quite solid.

Zoom’s Growth Prospects

Arguably Zoom’s biggest current drawback is its lack of projected growth. Over the next five years, the company’s earnings are expected to remain almost totally stagnant.

There is, however, some hope from management in the form of aggressive cost-cutting measures. Earlier this year, the company announced a plan to lay off roughly 15 percent of its workforce.

Key executives have also taken substantial pay cuts, suggesting a shift toward much more prudent spending at Zoom. This approach could eventually produce higher earnings and, as a result, higher stock prices.

Revenue growth at Zoom currently relies on acquiring more high-value enterprise customers. In this effort, management has been fairly successful. Over the last year, the number of customers contributing at least $100,000 in annual revenue rose 23 percent to 3,580.

Is Zoom Priced Like A Value Play?

Zoom’s valuation metrics are mixed but generally positive. At 16.2 times forward earnings, the stock is priced more like a mature company than a high-growth tech stock.

The price-to-sales ratio of 4.7 is similarly encouraging. For reference, Microsoft’s price-to-sales ratio is 12.2, suggesting that Zoom is priced favorably compared to its closest competitor in video conferencing.

One key metric investors may want to consider is Zoom’s price-to-earnings-growth ratio, which is currently 0.65. A PEG ratio of under 1.0 is considered a sign of undervaluation relative to near-term growth.

Given Zoom’s seemingly low long-term growth prospects, however, this metric may carry less weight than it would in the case of a company with more robust growth.

With that said, there are also some red flags in Zoom’s value metrics. The company’s price-to-cash-flow ratio, for instance, is quite high at 32.2.

Analysts are mostly bullish on Zoom. The consensus 12-month target price for the company based on analyst forecasts is $82.94, about 24.7 percent above the most recent price of $66.50.

Profits, What Profits?

One of Zoom’s most obvious risk factors is its slim profitability margins. At just 0.12 percent, Zoom’s net profit margin has fallen drastically from its highs during the pandemic years.

If Zoom fails to turn this trend around, the company could easily incur operational losses. Although Zoom is in an attractive financial position to cope with such losses, investors could see their shares trend downward if it falls into the red.

Even by remaining in the black, Zoom could struggle due to anemic growth for some time to come. Higher share prices may prove elusive. Unless Zoom can regain its footing and generate significant earnings growth, investors who put their money into the stock could incur opportunity costs.

Is Zoom a Buy, Sell or Hold?

Due to its slow growth and thin profit margins, Zoom is going through an understandably difficult period. The stock trades at a fraction of its pandemic-era highs, and the company does not seem to have a strategy for regaining its previous growth rate.

Zoom does not, however, appear to be a lost cause. The company retains a massive share of the video conferencing market, and its strategy of targeting high-value customers has allowed it to sustain at least some level of positive revenue growth.

The company’s strong balance sheet also gives it a high degree of financial stability and the ability to invest in new growth initiatives in the future.

At this time, Zoom is likely a better stock to hold than to buy. Current shareholders may see improved prices if Zoom’s cost-cutting measures and continued focus on larger customers produce higher earnings.

Likewise, those interested in Zoom may find the stock less uncertain if and when earnings begin to increase again. As such, a “wait-and-see” approach is likely the best for Zoom stock today.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.