Zoom Video Communications (NASDAQ:ZM) has grown revenue at an enormous clip this year, and while it certainly trades for a high valuation, it has proven incredibly profitable. Cisco Systems (NASDAQ:CSCO), on the other hand, is facing serious competitive threats from just about every angle, and across all of its business segments. But it's not likely to be completely disrupted, or rendered irrelevant. To the contrary, it's also enormously profitable, and is likely to remain an important supplier of technology hardware and services for many decades to come. 

But can it possibly be a better investment than the hyper-growth Zoom, say, over the next five years? It's not growing at the rate Zoom is, but it's also undervalued by most metrics, and offers investors looking for income a solidly dependable 3.5% dividend yield. On the Dec. 7 edition of "The Wrap" on Motley Fool Live, host Jason Hall and Motley Fool contributors John Bromels and Brian Feroldi discuss why Zoom is likely to be the better investment. In short, it's an incredibly high-quality business that's likely to see demand for its video communications tools grow for many years to come. 


Jason Hall: That's the one thing I come back to, it really is. Thinking about what happens over the next five years. First of all, Zoom realistically doesn't really have competitors. It does. I mean, there is WebEx, there is Skype.

John Bromels: There's what now? What are these? (laughter)

Jason Hall: Exactly, right? They exist in theory and somewhat in application. They've been around a lot longer, but there's clearly one that works, that people love that has maximum network effect benefits because everybody uses it.

John Bromels: I will also say, literally, since the pandemic began, I have never had a request to do anything other than Zoom.

Jason Hall: Not on purpose, I haven't.

John Bromels: Even from family and friends who have Apple's FaceTime, we don't do that anymore, we do Zoom meetings.

Jason Hall: I think there's huge value to that. The thing that I keep coming back to is that, Cisco is a good company. It's not a great company. A lot of its growth has had to turn into acquisitive because they haven't been able to innovate themselves out of a box for a while. They're definitely running into some challenges on the hardware side because hardware is a service stuff, to Brian's point, is taking share.

They're trying to make up lost ground against the most powerful name in video conferencing. Their most important business, there's other companies that are doing it better in ways that their customers prefer to do it. You're paying 7 million times sales for Zoom. But here's what matters for me; I own Zoom, I will probably buy more Zoom at some point relatively soon because the price has come down, and I think it is a wonderful, incredible business.

I have no intention of buying Cisco. But it pays a 3.5% dividend yield, and for somebody who's goal isn't necessarily to crush the market, don't sleep on Cisco. I guess that's what I'm thinking. Does that makes sense, guys?

Brian Feroldi: Zoom's only trading at 128 times forward earnings.

John Bromels: What?

Jason Hall: Because all of its revenues are free cash flow. Not all of it, but it has insane cash flows. It's incredible.

Brian Feroldi: That's a high number. The (price to) sales multiple is super nutty. It just shows you that this company does have earnings and free cash flow, and boy, has it grown those fast. So yes, very high valuation, if there's a company on Earth that deserves a high valuation, it's Zoom.

Jason Hall: Agree 100%. Almost $2 billion in trailing 12-month revenue and $1.04 billion free cash flow.

Brian Feroldi: Crazy.

Jason Hall: That's 50% revenue to free cash, yeah, that's nuts. We've beat that to death, we have, but I think for good reason. 

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.