Here's Why Zoom Isn't Just a Pandemic Stock

Zoom (ZM 3.38%) was the stock that investors just couldn't stop talking about in the early days of the pandemic. With reopenings in many countries around the world well underway and more people returning to the office, some investors seem to have lost confidence in the stock's long-term prospects and its ability to sustain durable returns in a post-pandemic world. In this segment of Backstage Pass, recorded on Sept. 20, Fool contributors Brian Withers and Rachel Warren discuss why she chose Zoom as one of her first stock buys and why they both think the tech stock's run isn't close to being over yet. 

Brian Withers: Let's talk about another winner, Zoom. I think this is one of my favorites and I bought shares recently within the past few months as well. Even as the vaccines are getting out across the world. But just to step back from Zoom briefly and just take in what their most recent couple of years has been. It's just absolutely incredible.

Rachel Warren: [laughs] Yeah. 

Brian Withers: They project this 130% compound annual growth rate. That's just absolutely amazing. The numbers over here are impressive as well; $5 billion in cash, free cash flow margin, meaning the free cash flow divided by the revenue is almost 45%. That's just absolutely stellar. I don't know that there's other companies. I don't know that there's another company that can match that.

Then having 13 quarters in a row of 130% dollar-based net expansion where customers who spent $1.00 last year are now spending $1.30 this year. Just absolutely tremendous. What I get excited about for the future of Zoom is, they did this slide for their Zoomtopia investor presentation. They showed these percentages here, are percentage penetration of the global 2,000. So, the top 2,000 companies across the globe. Obviously, these companies are international and large, and would benefit from having a Zoom product across the enterprise.

They've only captured 36% of the global 2,000 that are spending more than $10,000 on an annual basis. You move up to $100,000 at 16%, you move up to $1 million, it's only 5%. They have a number of customers that have recently moved. Obviously, that's 5% of the global 2,000, so there's a number of customers that are spending in excess of $1 million dollars for Zoom across the enterprise, which is just amazing.

But this shows you that they have significant opportunity to grow even in the places where they've been, both the existing customers and in the large customers across the world.

Here's a great example of how that happens and I wanted to show you. We often watch daily stock moves and quarter-to-quarter earnings announcements. But you look at this relationship with this large financial services company and they've expanded their relationship over four years. 

When you talk about owning companies for long periods of time, this is a great example of why things take time. It was neat that initially, they purchased Zoom Rooms and Meetings, and then they expanded that. They expanded their Meetings and then they added Zoom Phone, even expanded Zoom Rooms. They're in FY22 fiscal year, this current fiscal year which ends next January. This company is spending 4X the monthly recurring revenue that they did four years ago.

That's just tremendous. You can see the Meetings and number of Phones and Rooms here under the contract has just grown significantly over time. They had another example, which is a similar example where they've added additional products along the way and with its purchase of Five9 for the contact center, that's another way that Zoom can leverage its customer base to expand its market.

What got you to add Zoom to the top 10, Rachel?

Rachel Warren: I think just building off of what you were saying. I loved that I was able to take advantage of the opportunity to get the stock at a discount. If any investors that have been following what's been happening with Zoom stock, shares are down, I think about 20% from the beginning of this year. I think a lot of that comes down to the fact that you had a lot of investors buying in early on in the pandemic profiting off of those super high highs that the stock experienced.

Then maybe some got a little antsy about its prospects in this newer post-pandemic-ish reality and some maybe just decided to move on to other things. I personally think the company has so much growth opportunity left to pursue. I think you have this situation we're in now with more and more companies that are going maybe partially remote, fully remote, hybrid work I think is getting bigger and bigger. 

That's particular area of growth that I think that Zoom can profit off of. Even though shares are down a little bit year-to-date, you still have these great quarterly reports that the company is releasing. The first quarter of its fiscal year 2022. It counts its year a little bit differently, it's currently in its 2022. It had revenue, reported was 191% up from the year-ago period. It's base of customers that had more than 10 employees, that was up almost 90% from the year-ago period, and then it built on that in the most recent quarter.

These numbers are still exceptional. It's not slowing down even though the world is reopening, there's more vaccines out. Sure, it may not be all triple-digit increases across all of those metrics, like you saw in those earlier days. But it's still recording really strong growth and I think it has a lot of room left.

Brian Withers: I can't resist sharing the price-to-sales graph. This is just amazing to me. You mentioned that the share price is down. Well, the share price is down as the metrics for the company are going up. What happens is, see this orange line, the stock peaked here late 2020 at $560, and the price-to-sales ratio at that point was a 120.

This is just insane. [laughs] But look what's happened. It's down to 23 now. If you look, I've maxed this out. This is the whole history of Zoom as a public company. It has not been priced better than it is today from a price-to-sales ratio. I would argue that the company is stronger than it ever has been right now, going forward.