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Should You Buy Zoom Stock Right Now?

By Danny Vena - Mar 25, 2020 at 8:33AM

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Zoom stock nearly doubled amid the coronavirus sell-off. Should you buy one of this year's biggest gainers or take your money and run away?

Since the onset of the coronavirus bear market, there haven't been too many stocks that have been spared from the carnage. The broader markets have lost more than a quarter of their value since mid-February, and that's after the Dow Jones Industrial Average gained more than 11% on Tuesday -- its biggest single-day gain since 1933. 

One of the standout performers so far this year has been Zoom Video Communications (ZM 4.22%). The cloud-based videoconferencing specialist has bucked the downtrend of the major markets, gaining more than 100% since the beginning of the year and up 32% since the market began its decline on Feb. 19. At the same time, the S&P 500 has fallen 24% and 28%, respectively.

This raises the question: With gains like those and so much baked into the stock price, should investors consider adding Zoom right now?

A person on a laptop in a video conference call with four others.

Image source: Zoom Video Communications.

A coronavirus boost

It's telling that since much of the worldwide workforce has begun working remotely (if at all), downloads of Zoom have been skyrocketing. It's currently the second-most downloaded app in the world, clinging to the top spots on both Apple's iPhone and Alphabet's Android charts.

First-time installations of the company's mobile app are up 213% last week compared to the week that began March 9 and have soared 728% compared to the week that began March 2, according to market intelligence company Sensor Tower. "Zoom's mobile app was installed about 3.7 times more than Skype's and 8.6 times more than Google Hangouts," said Randy Nelson, Sensor Tower's head of mobile insights. 

Metrics like this help explain why Zoom's stock is on fire.

Recent results

It's not just the rapid shift to remote work that has Zoom sitting in the catbird seat. The company reported fourth-quarter earnings earlier this month that blew the doors off expectations. Revenue grew 78% year over year, to $188 million, while non-GAAP (adjusted) earnings per share (EPS) nearly quadrupled to $0.15. To put that into the context of Wall Street's expectations, analysts' consensus estimates were calling for revenue of $176.55 million and EPS of $0.07. 

It wasn't just the financial metrics that impressed. Zoom's customer base increased to 81,900 customers with more than 10 employees, up 61% year over year, while those contributing $100,000 in trailing 12-month revenue surged 86%. It isn't just new customers that are boosting revenue. The trailing 12-month net dollar expansion rate for customers with more than 10 employees was above 130% for the seventh consecutive quarter, meaning existing customers are spending 30% more after the first year.

Given the current economic environment, it's also worth noting Zoom has a rock-solid balance sheet, with $855 million in cash and investments, and no debt.

A man looking at a computer monitor with 12 people on the screen.

Image source: Zoom Video Communications.

The competition is significant

When it comes to competition, Zoom's running with the big dogs. It competes with Cisco's WebEx platform and Google Hangouts. Microsoft competes in two ways, with its video conferencing platform Skype for Business and its Teams work collaboration platform. None of the tech titans should be taken lightly.

Yet with all the potential competitors out there and the years of experience brought to bear, Zoom continues to rack up stellar growth numbers. Customers reportedly like the platform's ease of use, reliability, and video quality compared to those of its rivals. Zoom has focused solely on video calls and improving the user experience, a move which appears to be paying off, as converts flock to its platform. There's also a free tier that encourages users to try it out before committing to a full-scale rollout.

Valuation

It's worth mentioning that the stock is by no means cheap -- in fact, it's quite the opposite. As of Tuesday's market close, the stock trades at more than 300 times forward earnings, and 41 times forward sales -- the textbook definition of a high valuation. Investors have clearly baked a great deal of growth into the company's current share price.

Those nosebleed-inducing numbers are high, even considering that analysts are expecting sales to grow 80% in the current quarter, 47% for the current year, and 33% next year.

How to decide

But the seminal question is "Should you buy Zoom Video Communications stock right now?" As with so many things, the answer is, "It depends." It's worth noting that I recently added to an existing position, as I find both the growth story and the opportunity compelling. 

If you are an investor that shies away from stocks with high valuations, steers clear of excessive volatility, or looks for a stock to generate quick gains, then Zoom isn't -- and probably never will be -- for you.

If, on the other hand, you'll accept a high valuation and an even higher sticker price for the right set of growth drivers, if you can handle the gut-wrenching peaks and valleys that are sure to come and have an appropriately long three- to five-year time horizon, then Zoom should have a place in your portfolio.  

Forewarned is forearmed.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$122.64 (4.22%) $4.97
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$267.70 (3.42%) $8.84
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,359.50 (5.11%) $114.66
Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,500.68 (2.68%) $823.32
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,911.74 (3.06%) $116.01
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$44.10 (2.73%) $1.17
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,370.76 (5.20%) $117.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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