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This High-Growth Stock Is Down More Than 40% -- Time to Buy?

By Matthew Frankel, CFP® and Jason Hall – Sep 6, 2021 at 6:17AM

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One of the biggest winners of 2020 has pulled back considerably.

Zoom Video Communications (ZM 6.89%) was one of the best performing stocks of 2020 but hasn't performed nearly as well this year. In fact, before the recent earnings-fueled dip, Zoom shares were about 40% off their 52-week high reached in late 2020. In this Motley Fool Live video clip, recorded on Aug. 23, contributors Matt Frankel, CFP, and Jason Hall discuss why Zoom may have pulled back and whether it could be a smart investment now. 

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Jason Hall: Zoom Video Communications, and it's interesting. I want to say this off the bat, I think this is something that we generally try to talk about with a lot of episodes of The Rank. Sometimes, we rank businesses that the lowest ranked one, we think is a dog. We think it's junk, we think you shouldn't own it. I think in this case, again, we're talking about stocks that Matt owns, I own or maybe both of us own. I think it's important to remember, I think this is one of those shows that our rankings are probably more about our conviction and not whether we think it's a bad business or a good business because I ranked this as my fifth stock of the six. I own a lot and I think it's a wonderful business and it's well run. What's the story was in video communication. As you said, I think this is definitely the epitome of the stay-at-home, work-from-home stock from 2020. In a nutshell, that's Zoom. Its core business, of course, is providing telecommunication service, video conferencing largely to businesses, but also people use it for personal use. If you look at the growth rates, I don't have it right in front of me, but I think the revenue that it reported, its growth rate for its first quarter was up 190% revenue growth. That was revenue in calendar 2021 that it reported. The company is set to report in about a week. It's going report its second quarter. I think there is a tremendous amount of interest to see how the company's businesses performed. If you start looking at certain segments, there are certain cohorts of customers, the number of customers that spend more than $100,000 per year doubled in that first quarter. It's a business that even though we say it's the epitome of the stay-at-home stock or work-from-home stock, it has continued to grow at a very, very high rate. Then you think about the economics of the business, incredible cash generation. Its cash margins, I think they're somewhere along the lines of 50%. It's absolutely immense, the amount of cash that this business generates from its operations. What's the story with the stock? Couple of things, because its high price was actually reached back in 2020 last fall. It peaked a little bit again earlier this year and then it fell again since reaching its 2021 peak. It's really that pivot. There's the expectations of the growth is only going to play out for so long. What's going to happen when we go more and more to normal ways of business? We don't know the answer to that yet, right, Matt? For every company that said they were going to have their workers back in the office this fall, there's 20 companies in that same industry that have said, "Yeah, we're going to hold off for a few more months." I think it's really interesting to watch it play out.

Matt Frankel: I've seen a more headlines with companies delaying their return to the office, than I have of returning to the office lately. I ranked them six. It's a great business. It's the one that I would be least excited in putting new money into now, which is I think why I got my No. 6. I tend to be the reopening guy at the Fool. I'm an eternal optimist when it comes to everyone wants to be out and about and get together and things like that. I just went to my first concert in a year and a half this weekend, it was fantastic. Everyone was so happy to be there. I tend to have more optimism when it comes to reopening than most. But having said that, a lot of our favorite stay-at-home stocks didn't peak till early this year. Zoom peaked in last fall as Jason said, and it's for a reason. That was before the vaccine news started coming out. That was when we didn't know if anyone was ever going to get back to the office. If you remember Pfizer's first phase 3 data started coming out in mid-November. I think it was Nov. 14 around. That's really what made the investors think twice. Then when the vaccine started being widely available in March, that was the second leg down. I don't think it's a bad business to own long-term. I think over the next few quarters and next year or two, it's going to get hit harder by the reopening than most people think it will.

Hall: Here's the chart. This just shows what we are talking about that peak. In the fall, I said about tons the vaccines started to get scaled up and rolled out and then again peaked in early February this year, there are a lot of our favorite tech growth stocks peaked over that same period. I just want to throw these numbers to overlay that just to see. You look at revenue, growth has continued to be very, very strong over that period. The question for me, I'm in that same boat with you in terms of the six, it's almost at the bottom of my ranking in terms of least interested in putting new money in right now. I think what it is is what is the market going to determine this business is worth, once the growth rate go slow? Then what does management do with all of those massive excess cash flows to diversify the business? Because we talked about optionality with the business with a lot of cash flows. Is it going to start buying back shares? What does its future look like beyond this hyper-growth phase? That's why I ranked them because it's just hard for me to predict what that looks like. I'm not selling. I love the business, and I intend to own it for a long time.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool has a disclosure policy.

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