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Why Zoom Video (ZM) Stock Still Offers Tons of Value

Close-up of the Zoom Video logo
Credit: Andrei / stock.adobe.com

There’s no question that Zoom Video (ZM), one of undisputed beneficiaries of the Covid-19 pandemic, has seen its growth begin to decelerate. After starting the year on a strong upward trend, Zoom stock has been punished consistently throughout the year. And the recent tech sell-off, driven by inflationary fears, has magnified Zoom’s decline.

For Zoom, however, inflationary fears and even concerns about rising bond yields, have served to fan the flames of the decline which, in my opinion, has been spurred by vaccine-related optimism and the world getting back to normal. Given how strong the company’s growth has been, thanks to the pandemic spurring “remote everything,” it’s hard to imagine that growth rate maintaining its pace. Just to give you an idea, at the start of the pandemic in 2020, Zoom Q1 revenue in 2020 not only skyrocketed 170% the company doubled its 2020 revenue forecast.

For some context, the 170% Q1 revenue surge was against company guidance for 50% revenue growth. But it gets even better. The company doubled the revenue growth rate in Q2, delivering a 355% rise, which remarkably it managed to accelerate twelve percentage points in Q3 to growth of 367%. As for the fourth quarter the company still reached growth of 369% adding two percentage points acceleration, posting Q4 revenues of $882 million.

Just to highlight how impressive Zoom’s 2020 was, its Q4 revenue total of $882 million was what it had originally forecasted for all of 2020.

Let that marinate for a second.

Zoom essentially delivered five to seven years of growth in one calendar year.

Obviously, it would be difficult for any company to sustain that level of performance if not for a once-in-a-century type of event like the pandemic. Accordingly, the stock got rewarded for those numbers as well. Pre-pandemic Zoom stock traded around $65 on its way to reach a 52-week high of $584, posting returns of almost 900%. That, too, was also in one calendar year. But in the same manner as the bad news of the pandemic was good news for Zoom, the market assumes the inverse is also correct.

There continues to be great news related to vaccines and the vaccination of rate of the U.S. population. The market anticipates a scenario where not only might Zoom produce a massive slowing in revenue, there is also the potential for revenue to decline on a year-over-year basis at some point this year. Growth investors want clarity on what will demand for Zoom products look like in the coming months and years. For value hunters, even more concerning is the fact that, despite the 45% decline Zoom has seen from its 52-week high, the stock still trades at 25 times forward revenue, which is somewhat expensive.

Yet here’s why I’m buying Zoom stock anyway. It’s not hyperbole to describe the company’s first quarter fiscal 2021 earnings results and its strong fiscal year guidance as anything short of impressive. Delivering Q1 revenue of $956.24 million, or 191% year-over-year growth, Zoom just posted its highest growth in the cloud software category. What’s more, adjusted EPS of $1.32 is also the company’s best performance, yielding free cash flow of $454.2 million, nearly doubling consensus of $280.4 million.

The figures not only underscores the strong management team Zoom has, the company’s guidance suggests it has lasting power beyond the pandemic. What’s more, the Zoom Phone and the company international expansion plans are two factors that are seemingly not yet priced in the stock. Until there are more meaningful signs of decline, I am staying long and buying on the dips.

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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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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