Zoom Video Communications (NASDAQ: ZM) was a rare bright spot for investors during the recent market sell-off. Zoom's stock more than doubled this year as the novel coronavirus (COVID-19) pandemic forced more people to work from home and use its collaboration services.
Zoom expects its revenue and non-GAAP earnings to rise 46% and 24%, respectively, this year. Those growth rates are impressive, but the stock already trades at over 300 times forward earnings -- which suggests it's overvalued at current levels.
Therefore, investors looking for a safer play on the video collaboration market should check out better-diversified tech companies with lower valuations and wider moats. Cisco (NASDAQ: CSCO), which competes against Zoom with its Webex service, fits that description.
Comparing Webex to Zoom
Cisco recently announced that daily meeting volumes on Webex had more than doubled since the beginning of March and expanded 2.5 times since February. Total volumes during peak hours (weekdays from 8 a.m. to 9 p.m.) were also up 24 times from normal levels.
Webex recently upgraded its free tier with a larger audience, longer meeting times, and other features in response to the virus outbreak. The upgrade gained 240,000 new subscriptions within the first 24 hours. Webex's paid tiers cost between $13.50 and $26.95 per host per month. Zoom offers a free tier and paid tiers for $14.99 to $19.99 per host per month.
Both platforms' free tiers host up to 100 participants per meeting for up to 40 minutes at a time. The paid tiers serve larger audiences and offer longer meeting times, more comprehensive customer support, more cloud storage, and other perks. Webex offers end-to-end encryption for its meetings, but Zoom only offers end-to-end encryption for audio streams instead of video streams, which recently sparked allegations of false marketing from some users.
How much does Webex matter to Cisco?
Cisco lumps Webex with other software services (including other collaboration services like GoToMeeting and TeamViewer) in its applications segment, which generated 11% of its revenue in the first half of fiscal 2020. The segment's revenue dipped 1% annually during that period, as the softness of its Unified Communications business offset the stronger growth of AppDynamics.
During the first-quarter conference call, Cisco discussed Webex's end-to-end encryption capabilities and new network edge services for phone, desk, and room-based video systems. In the second quarter, Cisco highlighted the addition of new AI and machine learning tools to the platform. However, Cisco only recently revealed Webex's actual growth rates in its aforementioned update.
Is Cisco a better "remote work" investment than Zoom?
Investors seeking a "pure play" on collaboration software probably aren't impressed by Cisco, which generates most of its revenue from switches and routers -- two sluggish markets which have been heavily saturated and commoditized.
On its own, the growth of Webex won't offset the weakness of Cisco's core hardware business or the weaker parts of its Unified Communications suite anytime soon. It also won't overtake Cisco's security segment -- its strongest business in recent quarters -- as a major growth engine.
Yet Cisco remains a market leader in enterprise networks and data center hardware. The surge in remote work, social distancing measures, and lockdowns will pressure the bandwidth of data centers with the rising usage of collaboration services, streaming media, e-commerce platforms, and other cloud-based services.
That boost will likely generate a tailwind for Cisco's hardware business as data centers upgrade their hardware. Cisco often bundles its applications and security software with its hardware in cost-efficient bundles, which arguably gives it a competitive edge against smaller players like Zoom.
A safer and smarter play for a volatile market
Cisco's stock currently trades at 15 times earnings with a forward dividend yield of 3.7%. That low valuation and high yield should set a floor under the stock, even if the coronavirus crisis throttles its near-term growth. Zoom will probably remain a hot growth stock for the foreseeable future, but the valuations are too high. Investors seeking a better-diversified investment with a little exposure to the collaboration tailwinds should stick with Cisco instead.
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Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends 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.