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3 Great Reasons to Buy Zoom Stock

By Jeremy Bowman - Jun 3, 2021 at 11:45AM

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It's a mistake to think this growth story is over.

Zoom Video Communications (ZM -3.91%) was a market darling in 2020, but lately it has been mostly forgotten.

After the stock soared nearly 400% last year, shares are now flat year to date in 2021, lagging the S&P 500. With many Americans now vaccinated and economies around the world starting to reopen, Zoom is no longer in vogue like it was at the height of the global health crisis.

But following the video-conferencing specialist's first-quarter report, investors were reminded of several reasons why Zoom is still a great stock to own. Let's take a look at three of them.

A computer screen showing a Zoom call

Image source: Zoom.

1. The Zoom boom is far from over

Zoom may never again be as buzzworthy as it was during the height of the pandemic when lockdowns drove workplaces, schools, and other communities to adopt the cloud-based video-conferencing technology. But Zoom's recent results and guidance make it clear that hybrid work is here to stay

Revenue in the first quarter surged 191% to $956 million, easily eclipsing the company's own guidance and the analyst consensus. Even as the company faces headwinds from the economic reopening, it still expects revenue to grow sequentially to $985 million to $990 million in the second quarter, representing nearly 50% growth from the second quarter a year ago. Management also raised its full-year guidance to nearly $4 billion in revenue, up from less than $3.8 billion previously, as the company's guidance tends to be conservative.

Though some investors are concerned about threats from tech giants like Microsoft and Google, Zoom is enhancing its platform to make its independence an asset. The company recently reintroduced its software development kit to allow developers to embed Zoom technology in another app, adding to its utility and strengthening its competitive advantages.

While the pandemic tailwinds will fade, there's little doubt that remote work and learning will grow over the long term, expanding Zoom's addressable market.

2. Profit margins are huge

There are a number of popular high-growth cloud stocks that aren't profitable. That's not the case with Zoom. In fact, it's one of the most profitable stocks you'll find anywhere. 

In the first quarter, its adjusted net income was $402 million, a profit margin of nearly 45%, and its free cash flow was $454.2 million, giving the company a free cash flow margin of nearly 50%. At scale, Zoom has demonstrated that it's a highly profitable business, as most of the subscription fees from incremental customers flow directly to the bottom line. Because of its brand recognition and the evident value of its product, Zoom can afford to spend less on marketing than many of its cloud peers, and profitability should get a boost once K-12 schools return to in-person learning (Zoom has been giving its product to many schools for free).

In the first quarter, adjusted earnings per share of $1.32 easily beat the analyst consensus at $0.99. For the full year, the company expects adjusted earnings per share of $4.56 to $4.61, which could easily move higher given the company's history of raising guidance. Based on that forecast, the stock is trading at a forward price-to-earnings ratio of 72, which looks like a very reasonable price for a high-growth company in today's market.

3. Employees love the company

Competition for talent in the software industry is intense, but Zoom is one of the most-loved companies in the country, according to Glassdoor. Zoom rates 4.7 stars on the job search site, with 94% of respondents saying they recommend the company and 98% saying they approve of CEO Eric Yuan. Zoom has also been as high as No. 2 on Glassdoor's list of the best places to work, and Yuan was rated the No. 1 best CEO in 2018.

Yuan, who has one of the more inspiring stories you'll find among tech CEOs, has said that his employees' happiness is his top priority. That's proven to be wise strategy as Zoom's workplace culture is a key asset, and one reason the company was able to scale up so suddenly last year. Its ability to attract and retain top-notch talent also gives it a competitive advantage. Ultimately, a company like Zoom is only as strong as its employees, and Yuan's focus on employee happiness will help ensure that Zoom remains a leader in video conferencing and the broader cloud computing industry.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Zoom Video Communications. The Motley Fool owns shares of and recommends Microsoft and Zoom Video Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$108.80 (-3.91%) $-4.43
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$293.16 (-0.10%) $0.31

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