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3 Reasons Zoom Video Communications Stock Still Looks Like a Long-Term Winner

By Jeremy Bowman – Sep 15, 2020 at 6:21AM

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Besides the blowout numbers, there are a lot of things to like about the videoconferencing star.

Zoom Video Communications (ZM 4.87%) has been one of the biggest winners during the coronavirus pandemic.

The stock is up nearly 500% year to date as the videoconferencing specialist has delivered a pair of blowout earnings reports with revenue skyrocketing 355% in the second quarter. Businesses, non-profits, schools, and everyday consumers have embraced the videoconferencing platform, which has become an essential utility during the crisis.

While the company's recent performance speaks for itself in explaining the monster gains, there are other reasons to believe the stock will be more than just a pandemic-era sensation.

A Zoom video conference

Image source: Zoom.

1. Growth was booming before the pandemic

Zoom was anything but a sleepy stock before the crisis. In the fourth quarter of 2019 -- its last before the pandemic started -- revenue soared 78% to $188.3 million, capping off a year in which the top line nearly doubled, rising 88% to $622.7 million. 

In other words, Zoom was already seeing rapid adoption of its videoconferencing platform before the pandemic, and while the crisis may be artificially inflating demand for videoconferencing at the moment, it's a mistake to discount the long-term potential of a product that was already growing like a weed in 2019.

That quarter also featured 86% growth in customers contributing more than $100,000 in annual revenue, and its seventh straight quarter with a dollar-based net expansion rate above 130%, showing customers are quickly increasing their spending with Zoom.  The company was also profitable, a rarity for a software-as-a-service (SaaS) stock, featuring an adjusted operating profit of $38.4 million in the fourth quarter, good for an operating margin of 20.4%. 

Zoom was already a strong business before the pandemic, and its 2019 performance should remind investors that any post-crisis hangover should be short-lived.

2. It's got a top-notch leader

Company leadership is probably the most important qualitative metric for investors to evaluate, but it's not easy to do so as it's difficult to understand the inner workings of a company if you're not there.

However, Zoom's Founder and CEO Eric Yuan is an exemplary leader, by all accounts, and it's hard to find a CEO who's overcome more adversity to get to their current position.

Yuan's visa application to come to the U.S. from China was rejected eight times. After two years and nine applications, he was finally granted a visa in 1997. Yuan didn't speak English at the time but knew how to code and landed an engineering job at WebEx, which was acquired by Cisco. In 2011, Yuan pitched Cisco leadership his idea for a videoconferencing app but was rejected, so he struck out on his own with about 40 Cisco engineers following him. That kind of loyalty is remarkable, and shows Yuan's capabilities as a leader to inspire people.  

Raising money wasn't easy at first. Most venture capital firms rejected his proposal, noting that Microsoft had just acquired Skype for $8.5 billion and Google was making it own play for the market. However, Yuan eventually got enough funding to get Zoom off the ground, and the rest, as they say, is history. Like, the visa application story, the Zoom founder again demonstrated an unusual level of determination in getting his company started.

On the employment review site Glassdoor, Yuan has a 98% approval rating and 96% of respondents said they would recommend the company to a friend. One reviewer called Yuan "as transparent of CEO as there can be," while another said, "Zoom is led by the most genuine and humble man, Eric Yuan. He cares for all and truly believes in Delivering Happiness. This is evident in the culture he has created."

From an investor perspective, Yuan is exactly the type of leader you want to put your money with.

3. Brand equity has gone through the roof

The pandemic has done something for Zoom that wouldn't have happened without it: its brand name recognition has skyrocketed. Zoom went from being a niche business tool to being an everyday utility that Americans rely on for work, school, and connecting with friends and family. It's become a verb, and the de facto video chat platform for millions. That positioning will only get stronger as the pandemic endures, and it's going to be difficult to unwind, despite challenges from tech giants like Microsoft, Google, and Facebook.

Users also love the product. Zoom has a net promoter score of 70 in and industry with an NPS of 20, meaning users overwhelmingly recommend the product. On the most recent earnings call, Wall Street analysts actually thanked Yuan for the product and expressed their appreciation for it. This is extraordinarily rare. For example, RBC's Capital Markets' Alex Zukin said, "First, I want to say thank you from the analyst community and as a parent, as a husband. Yes, you've made a substantive difference in our lives." Heather Bellini from Goldman Sachs said, "Just thank you for keeping everybody connected. We're so appreciative." 

That brand power gives Zoom a ton of optionality going forward and is helping to launch it into a wide range of use cases including telehealth, real estate, education, and even virtual jury trials as Yuan noted on the call.

Investors have raised an eyebrow about Zoom's valuation, but looking at the company's guidance for the year, which includes $2.37 billion to $2.39 billion in revenue and adjusted operating profit of $730 million to $750 million, or earnings per share of $2.40 to $2.47, the stock looks reasonably priced, especially compared to its cloud peers. And it's not really more expensive than it was at the start of the year.

With a tidal wave of momentum, a dynamite leader, and an enthusiastic base, the upside potential for Zoom is enormous.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. 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, Microsoft, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
$77.54 (4.87%) $3.60
Meta Platforms, Inc. Stock Quote
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$140.28 (1.21%) $1.67
Microsoft Corporation Stock Quote
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The Goldman Sachs Group, Inc. Stock Quote
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$314.87 (5.25%) $15.72
Cisco Systems, Inc. Stock Quote
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