Is Zoom Stock Overvalued? - Financhill

Is Zoom Stock Overvalued?

Is Zoom Stock Overvalued? In early 2020, Zoom (ZM) was a relative unknown in the video conferencing industry, competing against long-established giants like Cisco (CSCO), Microsoft (MSFT), Google (GOOG), Blackboard, and Skype. It traded at less than $70 per share, and it had to woo each and every new customer. 

Then, the pandemic hit, and Zoom’s fortunes changed dramatically. It became the number one choice for quarantined families and those abruptly sent home to work.

Entire school districts chose Zoom for their virtual classes, and Zoom references popped up in all sorts of social media and consumer-generated content. Even an unexpected – and fairly serious – security failure did not slow Zoom’s customer growth. 

Why was Zoom the international choice for staying connected through the pandemic? Experts say that Zoom shines above its competition when it comes to technology; specifically the challenge of delivering real-time video globally at scale is difficult and Zoom stands head and shoulders above the competition.

Regardless, what is certain is that in a matter of months, Zoom achieved years’ worth of growth, and investors are reaping the rewards. 

The question for new investors is whether there is still room for growth, or has Zoom hit its peak? In other words, is Zoom stock overvalued, or is ZM a good investment?

Why Zoom Stock Went Up?

Zoom was a solid company with a solid product before the pandemic, but the massive influx of users in March 2020 and beyond delivered results beyond anyone’s wildest expectations.

At first, there was some question of whether increased use would translate into revenue, as many individual subscribers chose the service’s no-fee, limited features option.

By the end of the second quarter it was quite clear that while many pay nothing to use Zoom technology, the platform’s popularity among larger organizations would make up the difference. 

According to second quarter results, there are hundreds of thousands of businesses subscribed to the platform’s paid version that includes a wider array of features.

Specifically, Zoom reported that a total of 370,000 clients subscribed to plans for 10 or more employees. That’s an increase of 458 percent year-over-year. 

With numbers like that – and no end to the pandemic in sight – it’s no wonder Zoom stock went up. Of course, there is a vocal group of industry experts that question whether share prices are overvalued. After all, as they point out, the pandemic will end at some point. When it does, will Zoom lose its massive customer base? 

How Solid Are Zoom Financials?

Zoom’s first quarter financial results were far above projected figures, which gave share prices a solid boost. However, when second quarter results showed even more impressive gains, the stock became a must-have.

The company increased revenue by 355 percent year-over-year for a total of $663.5 million. Even with the knowledge that Zoom was raking in cash, analysts had predicted just $500.5 million for the quarter. 

Zoom used a chunk of that revenue to reinvest in the business. It tweaked technology and scaled up operations, which is good for profit. In fact, second quarter operating profits hit $277 million – that’s 13 times more than the same period last year.

All of this has driven demand for Zoom stock, which means prices are rising fast. By Fall, shares were up over 500% for the year.

Will Zoom Stock Drop?

Towards the end of September, the United States hit a devastating milestone: 200,000 deaths attributed to COVID-19, and almost seven million recorded cases.

While there are several vaccines in Phase III clinical trials, most health experts agree that widespread distribution is impossible before mid-2021. 

Meanwhile, cooler weather and lockdown fatigue has contributed to outbreaks around the world. Some European countries are considering renewed shutdowns, and it is possible that the same could happen in the United States as winter fans the coronavirus flames. 

These events drove Zoom stock prices up still higher, and there are concerns that this growth can’t possibly be sustained.

Investors are worried that share prices will drop, perhaps suddenly, leaving those who bought in at the peak facing significant losses. New investors want to know, is Zoom stock overvalued? 

Is Zoom Valuation Too High?

Given its extraordinary ascent, all eyes are on Zoom, which means some of the most experienced industry analysts have given an opinion. Though not everyone agrees, the majority believe that Zoom’s success won’t disappear post-pandemic. 

The most persuasive factor in that assessment is the fact that Zoom was growing at a solid clip pre-pandemic. Yes, socially distancing contributed to the sudden increase in demand over the past six months, but that demand wasn’t out of reach for the company – the timeline was simply compressed. 

In the fourth quarter of 2019, before there was any hint that the world would grind to a halt over the novel coronavirus, Zoom reported a 78 percent increase in revenue over fourth quarter 2018 for a total of $188.3 million.

The full year produced revenue growth of 88 percent over 2018, totaling a solid $622.7 million. The fourth quarter 2019 results demonstrated that Zoom was already gaining market share, with an 86 percent increase in subscribers. 

Finally, Zoom was profitable in the fourth quarter of 2019, despite the fact that it was still considered something of an industry fledgling. Analysts already had high hopes for Zoom stock, before the windfall of customers that started in March 2020.

Of course, even with those strong fourth quarter 2019 results and the subsequent growth in 2020, there is an argument that the current share price is excessive. However, most analysts indicate that they are comfortable with the company’s current valuation, given its strong potential over the next 12 months and beyond. 

Is Zoom Stock Overvalued? The Bottom Line

It’s hard to say whether Zoom shares will continue their nearly vertical trajectory – and there may even be a bit of a drop when the world declares victory over COVID-19.

However, many lifestyles adjustments such as video conferencing vs. travel and virtual work are likely here to stay. Nevertheless, a discounted cash flow forecast analysis puts the intrinsic value of ZM stock at $439, suggesting above that it’s overvalued.

The number of new users might slow a bit, but Zoom is likely to remain an essential tool for individuals and businesses long-term. 

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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.

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