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Zoom Stock is Down: Still Overvalued, or a Buy at Recent Prices?

By Jason Hall, Danny Vena, and Brian Feroldi - Dec 6, 2020 at 8:25AM

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Maybe both?

Shares of Zoom Video Communications ( ZM -4.08% ) have lost more than 27% of their value since mid-October. Investors have seemingly concluded that the company, whose namesake product has become synonymous for the entire industry, is set to cede much of its growth in a post-pandemic world. 

But even with the recent sell-off, Zoom shares are stillup an incredible 504% in 2020. There's no getting around the fact that this is a very richly valued company by almost any valuation metric. On the Nov. 10 edition of "The Wrap" on Motley Fool Live, host Jason Hall and Motley Fool Contributors Danny Vena and Brian Feroldi discussed Zoom's prospects going forward. 

Transcript: 

Jason Hall: Zoom dropped about 30% from all-time high after the (coronavirus) vaccine was announced. Is Zoom overvalued at current prices or is it time to buy? What is your perception? Who wants to talk about Zoom?

Danny Vena: I can start.

Brian Feroldi: Go ahead, Danny.

Danny Vena: Zoom is overvalued using traditional metrics, so are a lot of small, fast-growing companies. I have not been one for using traditional metrics.

But I mean, if you look at the growth rates, I think in the most recent quarter, their revenue grew by something like, it would take too long to look it up, but I want to say 384% year-over-year; if memory serves. It's ridiculously high growth. What's happening here, and I know Brian Feroldi has an opinion on this software as a service type stocks, they have the platform in place, and now it's about leverage. The more people that they add to it, the more users they add to it, the more big paying companies they add to it, the more money drops to the bottom line. Brian?

Brian Feroldi: Yeah. I think it was 355% last quarter.

Danny Vena: Okay.

Brian Feroldi: Pretty good. But I could tell you this, I did interview with somebody earlier today, and he wanted me to use Skype, and it sucked. It sucked so bad. I was like, ''Can we please use Zoom?'' This is why Zoom is worth $100 billion. But Zoom is a ridiculously high-quality company. It is exceeding every single expectation that I had for it, and I wish I bought it when I talked about it in industry focus and said, ''Eighty bucks a share, it's kind of expensive.'' Is it overvalued right now? I don't know. I've been wrong in evaluation the entire way up.

Jason Hall: Here's the thing, and I've said this a bunch of times on here, and it always makes me sound smart when I can say, ''Well, David Gardner said or Tom Gardner said.'' But I distinctly remember, it's like just something that one of the things that really stands out to me about Motley Fool Live is Tom Gardner talking about Zoom, and he did an hour long show with him, and I think John Rotonti. He said that Zoom is one of a handful of companies he thinks is going to be worth a trillion dollars in the next decade.

There you go, and here's my experience. I've seen Zoom. You think about Zoom is like this. It's a hammer, everything is a nail, it does one thing. There is so much capability in this platform that so many organizations can use, and businesses aren't saying, "Well, I can't wait till we can walk away from Zoom when this is all over." They are about Skype because Skype does stink.

Danny Vena: Yeah.

Jason Hall: Yeah. Exactly, very much badly. The bottom-line is that businesses and organizations are now thinking about how they can use Zoom to do whatever they do better, even when things go back to normal. It's an immensely powerful communications tool, and it just unlocks so much about how businesses and organizations can communicate.

Valuation be what it is, I think Zoom will be worth a lot more in five or 10 years than it is now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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ZM
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