Is Zoom Video Communications Stock a Buy?

Zoom Video Communications (ZM 1.35%) just reported another quarter of incredible user growth. The company said it ended April 2021 with about 497,000 customers with 10 or more employees, an 87% increase from the same period last year and some 30,000 more than three months ago. Clearly, video conferencing among businesses is holding strong even as effects from the pandemic start to ease.

However, Zoom will be entering a more difficult stretch as it starts to lap the massive bump it got from COVID-19 in the spring of 2020. Some of this risk has already been priced in, as the stock has been nearly cut in half from it's all-time high last autumn. With investor narrative currently favoring "economic reopening" plays right now, I think Zoom is a buy.

Image source: Getty Images.

Here comes the big "slowdown"

Zoom's first-quarter fiscal 2022 (the three months ended April 30, 2021) revenue surged 191% higher to $956 million as it lapped one more period of pre-pandemic results. It's been an incredible run as both businesses and individual users flock to the platform.

Data source: Zoom Video Communications. YOY = year over year.

The outlook for full-year fiscal 2022 was also upgraded, now implying full-year revenue growth of about 50% to a range of $3.975 billion to $3.990 billion (a more than $200 million increase over prior expectations for fiscal 2022 provided three months ago). At any other time this would be great news. However, full-year growth of 50% implies a massive slowdown from the 191% year-over-year rate just posted in Q1. Zoom's management often underpromises and overdelivers, but the current guidance nevertheless indicates growth will dip below 50% later this year. Given shares now trade for some 24 times full-year 2022 sales, this is no cheap cloud computing stock.

Zoom is still a high-growth company, though. This looming slowdown has more to do with the company lapping results from a year ago when revenue was growing more than 300%. Not only is Zoom holding on to most of its new pandemic-era customers, it's still forecasting a more than respectable rate of expansion. The more than 30,000 new customers with over 10 employees it's been adding in each of the last few quarters speaks to the fact that video conferencing will likely be an important part of business operations going forward. 

An incredibly efficient cloud communications business

I believe the reason for Zoom's success -- and its enduring growth story -- is more about how efficient video communications are and less about the pandemic. Sure, COVID-19 was a positive catalyst for Zoom, but it merely accelerated adoption of video conferencing. Replacing business meetings with video is a time and resource saver, and there are still thousands of organizations around the globe that have yet to make the jump to the remote work-first model. 

Zoom itself already benefits from this with its cloud-based software-as-a-service operation. Adjusted operating income is expected to be at least $1.425 billion this year (which would work out to a 36% operating profit margin). Added to this is an impressive balance sheet boasting $4.69 billion in cash and equivalents and no debt. Zoom thus has plenty of options (organic development and marketing or some acquisitions) as it looks for new ways to expand.  

Though 24 times full-year expected sales (and 60 times trailing 12-month free cash flow) is a premium price tag, Zoom stock is as cheap as it ever has been since going public back in 2019. With shares down sharply from all-time highs but the company still growing at a healthy clip, now looks like a good time to buy (or buy a little more if you're already a shareholder) Zoom stock for the long haul. I expect shares to be volatile this year as Zoom laps the skyrocketing growth it experienced early in the pandemic, but this is still very much a growth company.