Better Buy: Facebook vs. Zoom Video Communications

The coronavirus pandemic has certainly taken a financial toll on consumers over the past year. In the United States, unemployment reached 14.8% in April 2020, according to the U.S. Bureau of Labor Statistics. However, the pandemic has also negatively affected social well-being, as it prevented friends and families from traveling and gathering together.

Fortunately, platforms like Facebook (META -11.16%) and Zoom Video Communications (ZM -1.40%) were around to make life a little less difficult by allowing socially distanced interactions. Not surprisingly, both stocks performed well over the last year as a result, with share prices of Facebook gaining 80% in value and Zoom stock up 110%.

But which stock is the better buy today?

Image source: Getty Images.

Making the case for Facebook

Facebook and its other social platforms (Instagram, Messenger, WhatsApp) allow users to stay connected to the people and topics they care about. The company primarily generates revenue through the sale of digital ad space to marketers, both on and off Facebook-owned properties.

According to eMarketer, the average U.S. user spends 35 minutes on Facebook and 33 minutes on Instagram each day. That makes Facebook the most popular social platform in the United States, topping rivals like ByteDance's TikTok and Twitter. In recent years, that advantage has helped Facebook capture an increasing portion of U.S. digital ad spend.

Data source: eMarketer.

In 2020, Facebook's monthly active people (MAP) metric -- which measures the number of users accessing Facebook, Instagram, Messenger, or WhatsApp on a monthly basis -- reached 3.3 billion in the fourth quarter, up 14% from the previous year. Moreover, 79% of MAP used at least one platform on a daily basis, up from 78% in 2019.

In both cases, these figures indicate improving user engagement. That's encouraging for shareholders, and it helped drive an 8% increase in the average revenue per person. Even so, Facebook's sales growth decelerated to 22% in 2020, down from 27% in 2019. That's surprising, given that many people had more free time on their hands last year.

Even more troubling, the FTC and attorneys general of 46 states collectively filed a lawsuit against the social giant in 2020, alleging illegal monopolization. Specifically, the FTC alleges that Facebook acquired WhatsApp and Instagram as a means of eliminating competition. If the courts agree, Facebook could be required to divest both assets. That would be a serious blow to the company's future growth potential.

Making the case for Zoom Video Communications

Zoom's unified communications platform enables users to share content and interact through video, voice, and chat, regardless of device or location.

Last year, as the pandemic forced businesses and schools to close, employees and students turned to Zoom Meetings to facilitate remote work. That translated into accelerating customer growth.

Data source: Zoom SEC filings. Note: fiscal 2021 ended Jan. 31, 2021.

Notably, Zoom Phone -- the company's cloud-based phone system -- was actually the fastest-growing product in the fourth quarter. But its other products have the potential to be just as meaningful. For instance, Zoom Rooms combines Zoom Meetings with third-party hardware to transform corporate offices into modern video conferencing suites. This product facilitates teamwork through content sharing and interactive whiteboarding, and it could see strong adoption as more employees return to work.

Last year, Zoom's revenue reached $2.7 billion, up 326% from the prior year. That strong growth helped the company crush its internal guidance of $905 million to $915 million, as well as the estimates of Wall Street analysts. Moreover, it helped Zoom solidify its spot as the market leader in the video conferencing space, topping rival products from the likes of Cisco Systems and Microsoft.

In 2019, Zoom CEO Eric Yuan estimated the company's total addressable market (TAM) at $43 billion by 2022, but that was before the coronavirus disrupted life on a level that was previously inconceivable. In early 2020, Yuan updated his estimate, saying: "One thing we know for sure is the TAM [is] bigger than we saw it before."

While Yuan didn't provide an exact figure, the takeaway here is this: Zoom provides a critical product, and its market opportunity has expanded in the wake of the pandemic, driven by use cases like remote work, remote learning, telemedicine, and social interaction between friends and family.

The verdict

In terms of valuation, neither of these tech stocks looks cheap. But at nine times sales, Facebook stock is certainly cheaper than Zoom, which trades at 36 times sales. Additionally, Facebook is a much larger business, with much deeper pockets. But given the company's slowing growth and legal trouble, investors have every reason to be cautious here.

Zoom, on the other hand, is growing much more quickly, and the pandemic has helped expand its market opportunity. I think that creates more upside for long-term investors, and it's why Zoom wins this contest.