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Is It Too Late to Buy Zoom Video Communications Stock?

By Jeremy Bowman – Jun 16, 2020 at 8:30AM

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Shares of the videoconferencing specialist have soared during the pandemic. Can you still catch a ride on this rocket ship?

Few stocks have been as successful during the COVID-19 pandemic as Zoom Video Communications (ZM 1.07%)

Shares just touched another all-time high at $239.59 on Monday, and it's easy to see why. During the crisis, Zoom has gone from a niche business tool to an essential service, underpinning online social gatherings, business meetings, classes, and everything in between. The brand itself has become synonymous with videoconferencing, and though usage of videoconferencing has surged across the board, as companies like Facebook and Google have also reported, Zoom has been the clear winner here. It's the best known pure-play videoconferencing stock, and the one that has best monetized the surge in demand for videoconferencing tools.

An image of a Zoom meeting on a computer

Image: Zoom.

As you can see from the chart below, the stock has soared during the pandemic, more than doubling since February 21 when the market started to crash.

ZM Chart

ZM data by YCharts

Zoom's status as an essential tech tool during a time of social distancing has made it one of the biggest coronavirus winners on the stock market. But after such a remarkable run, is it too late to get in on this high-flying cloud stock? Let's take a closer look at what this company offers today.

The fundamentals

Zoom stock was expensive prior to the pandemic, and shares are even pricier today. On a trailing basis, the stock is trading at a price-to-sales ratio of 85 -- more expensive than even Shopify, a fellow high-priced cloud stock that trades at a more modest but still vertiginous P/S ratio of 54.

However, traditional fundamentals may be a bad way of valuing Zoom. After all, the pandemic has changed the company's value proposition, making it a necessity instead of a curiosity, and its first-quarter results are telling. Revenue in the first quarter, which ended April 30, jumped 169% to $328.2 million, and customers with more than 10 employees skyrocketed by 354% to 265,400.

Unlike many of its cloud stock peers, Zoom's performance on the bottom line was equally impressive, and the company is now solidly profitable. It turned in adjusted operating income of $54.6 million, while its free cash flow, the more closely watched figure in the sector, was a whopping $251.7 million, or 77% of revenue. That shows that the dramatic growth it saw from the pandemic nearly all flowed to the bottom line, at least on a cash basis. Those results also crystallize the power of the cloud-based subscription model, which can easily scale up to accommodate additional demand, converting incremental revenue directly into profit. The results prompted analysts to call it "one of the best quarters in software history."

Zoom's guidance was also applause-worthy, as the company sees full-year revenue jumping about 187% to $1.775 billion-$1.8 billion, which would make its price-to-sales ratio more reasonable at 37. The company also sees profits expanding, expecting adjusted operating income of $355 million-$380 million, and adjusted earnings per share of $1.21-$1.29, making its P/S ratio less relevant.

Though Zoom's results were clearly boosted by the pandemic, the videoconferencing dynamo was no slouch before the crisis. In 2019 -- pre-pandemic times -- revenue still soared, jumping 88% to $622.7 million, and it posted adjusted profit per share of $0.35, showing its business was growing fast and turning a profit before the crisis.

The big question

Though Zoom has already surged to a market cap of $67 billion after a stellar quarter and guidance calling for revenue to nearly triple this year, the question of whether or not the boom in videoconferencing is temporary is clearly hanging over the stock, as it whipsaws according to news about the economy reopening. For investors, Zoom is a great way to hedge the risk of a second wave of infections, which seems to have sent it to all-time highs in recent days. But there's more uncertainty around the stock once life gets back to normal, whenever that may be.

At least some users are likely to give up on Zoom when regular social interactions are available again, and businesses will use it less once offices reopen. But the company's momentum was formidable before the crisis began and is likely to continue, especially as there is evidence that at least some companies expect many of the changes initiated during the pandemic to stick. Companies like Twitter have said that they will allow employees to work remotely forever if they want, indicating increased use of videoconferencing, and many business executives expect remote work to become more common -- companies have learned to function remotely, and at least some employees are happier that way. Similarly, business travel seems unlikely to return to pre-COVID levels, as Zoom meetings can substitute for things like client visits.

Zoom is also well liked by its customers. The company has a net promoter score, on a scale of -100 to 100, of more than 70, meaning customers are overwhelmingly satisfied with the product. Its net dollar expansion rate for customers with more than 10 employees has been above 130% for the last eight quarters, showing that existing customers are increasing their spending with the company by more than 30% each year.

By almost any standard, Zoom is an excellent business with a very well-received and now essential product. It's experiencing an eye-popping surge in demand because of the pandemic, but its growth was already impressive beforehand. Its product has gone from a peripheral business tool to a centerpiece of the cultural zeitgeist and lexicon, and that brand awareness and familiarity won't be undone. Similarly, videoconferencing has gone mainstream.

The stock is very highly valued and usage of the product could slip as the economy reopens, but even after its monster gains during the crisis, Zoom's upside potential over the long term greatly outweighs the downside risk of a pullback or lower usage during a recovery.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook, Shopify, and Zoom Video Communications and recommends the following options: short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
$78.35 (1.07%) $0.83
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$139.07 (0.07%) $0.09
Twitter, Inc. Stock Quote
Twitter, Inc.
$49.39 (-3.72%) $-1.91
Shopify Inc. Stock Quote
Shopify Inc.
$30.06 (-2.50%) $0.77

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

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