Here's Why Zoom Is No One Hit Wonder

To say Zoom Video (NASDAQ: ZM) stock has been on fire would be an understatement. Year to date, shares have more than doubled -- with no end in sight. 

As the COVID-19 pandemic continues it spread around the world, millions of people are hunkering in their homes to work and play. Zoom has become a critical component of the self-isolated lifestyle, resulting in rapid growth in usage and time spent on its video-conferencing software. 

The stock has gotten so popular the Securities and Exchange Commission was forced to suspend trading in Zoom Technologies recently, because investors thought they were investing in Zoom Video. While understandable, Zoom Technologies hasn't filed with the SEC in five years.

Amid all that hype, it's not surprising some investors are calling Zoom a bubble stock. It's trading at a lofty valuation, and they argue it's too rich compared to rivals in the software-as-a-service market. But Zoom has a lot going for it, including envious revenue growth, that makes it more than a one-hit-wonder. 

A man on a video conference on his laptop


Zoom stands out for its ease of use

Seemingly overnight, millions of Americans are sheltered in place. That means families are separated, schools closed, and events canceled. To stay in touch, school systems, companies, and families and friends have turned to Zoom. The fact that it offers free services makes it an attractive option, but there is also the ease of use that's common in most winning technology products. That makes it a no-brainer for shell-shocked people and companies who need to stay connected in this now remote world.

Zoom hasn't disclosed how many more users it has gained since the pandemic began, but the company did say in its March earnings call that it's seeing a "large increase" in the number of free users as well as minutes spent on Zoom calls. We're just weeks into social distancing in the U.S., and Zoom's adoption is expected to grow even more as the virus spreads across the U.S. 

However, this red-hot growth isn't driven only by the coronavirus. Zoom was growing quickly before the pandemic. It ranked seventh as the fastest-growing app in the enterprise market by Okta, the cloud software company, and for its fiscal 2020 fourth quarter, it reported 78% year-over-year revenue growth. Full-year sales growth was up 88% to $623 million. Zoom ended fiscal 2020 with about 81,900 customers with more than 10 employees, marking a 61% increase over the prior year. Those numbers should be even higher when Zoom reports fiscal first-quarter results. 

RBC Capital estimates that Zoom downloads so far in March have surged 183%. The analyst figured each of these downloads brings an additional $11 in annual revenue. If demand continues unabated for the rest of 2020, RBC Capital estimates it could translate into $337 million in additional sales.

Diversification with a corporate product 

Zoom may be getting a lot of attention from regular users downloading its app, but its Zoom Phone offering could see a lift among business customers during the pandemic too. The cloud-based phone system is available for people who want to make a Zoom call but don't want video conferencing. With so many offices emptied of staff, that service is likely to become more popular during the pandemic. The more business customers it adds to the roster, the more valuable Zoom will be in the eyes of investors. In light of this unique situation, Zoom founder and CEO Eric Yuan noted during the call earlier this month:

Zoom is doing everything we can, especially for global educational institutions, to provide resources and support to our customers and those navigating the coronavirus outbreak, including: We are proactively monitoring capacity globally to ensure maximum reliability amidst usage increases; in China, we have removed the 40-minute limit on free meetings; and we are providing informational sessions and on-demand resources so anyone can learn how to use the Zoom platform with ease.

Over time, as people get accustomed to working from home, virtual classrooms, and cloud-based calls, companies may not be so quick to return to the old ways of conducting business. After all, there are a lot of advantages to having a remote workforce. It can reduce employees' commute times, boost productivity, help curb greenhouse emissions, and lower costs. It also allows companies to have a diverse workforce all over the world collaborating in real time. That may prove too appealing to fully go back to traditional physical offices.

Zoom didn't appear on the scene because of coronavirus, nor will it disappear once the virus is contained. There's no question the stock is enjoying some hype right now, but with a growing corporate and consumer user base -- and with video conferencing here to stay -- the future looks bright for this tech stock.

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Donna Fuscaldo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta and Zoom Video Communications and recommends the following options: short May 2020 $120 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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