Shares of Zoom Video Communications (ZM -2.12%) have been trending downward for 14 months and now sit more than 60% below their all-time high. Investors appear to believe the company was poised to profit only during the pandemic. But those who continue to hold for the long term have a different perspective.

In this video from Motley Fool Backstage Pass, recorded on Nov. 29, contributors Jon Quast, Matt Frankel, and Jason Hall discuss Zoom's prospects going forward. And one of them believes the company has a path to five-bagger returns, which would most likely be a market-beating investment in the coming decade.

10 stocks we like better than Zoom Video Communications
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Zoom Video Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of November 10, 2021


Jon Quast: Zoom, this is down 63% from its all-time high. And not this year's high. This is the all-time high reached during the middle of 2020. That's when the stock peaked. We're talking about over a year now of the stock going down 63% from that high. This has been a longer, more painful journey for Zoom shareholders and I'm right there with you.

Why is Zoom down so much? Quite frankly, why was it up so much in the first place? I mean, this was a little bit of the stock getting ahead of the company and the business fundamentals. I think that generally, you could say if your stock was almost a ten-bagger in 2020, it's probably taken a 50% haircut since. A lot of companies fit that profile. Zoom, no exception here. I think there was a little bit of a narrative that got ahead of the business fundamentals. I think that that narrative has now shifted away from Zoom. The narrative says that this company can't succeed now that we have a vaccine, now that we're getting control over this coronavirus. As we move away from the pandemic, the demise of Zoom, it is inevitable. That's kind of the narrative that is going on out there. I think that that is a lot bit of a mistake when you look at the business fundamentals as we'll see here in a minute.

Another thing that really hurt Zoom was a failed acquisition. They were looking to acquire Five9 and get into just expand their total addressable market. They were going to do an all-stock deal. That didn't really sit well with investors, the stock started tumbling and then the deal fell apart, [LAUGHTER] and then the stock tumbled even more from there. That is one big thing that did happen that has had a negative effect on the stock.

Now, a couple of growth drivers here that I think really buck the narrative that Zoom was a pandemic-only stock. This company is still growing. They have many products to build upon their existing products. So we're using Zoom right now, but they offer other things for companies that are already subscribed to Zoom's core product. Mainly, Zoom Phone to upgrade the internal infrastructure at a corporate office. They have Zoom Rooms, which is basically a conference room, but a whole lot of tech-enabled, very much tech-optimized conference rooms. These are a couple of growth drivers that the company has in ways that they can upsell existing customers.

This is actually playing out. As we see people go back to offices, it actually makes more sense for them to start thinking about these other services that Zoom offers. Now that we are going back to the office, make sense to upgrade it. In the most recent quarters, Zoom Phone, it's revenue was up over 100% year-over-year. They are expanding their services with existing customers.

Another thing that I thought was really interesting data point over, almost $2.5 billion and remaining performance obligations, that's up 51% year-over-year. This is stuff that they have under contract. It's going to happen. Maybe not necessarily right now, but you definitely want to see that trending upward. $5.4 billion in cash. Still incredibly profitable, $375 million in free cash flow in the most recent quarter. Like I said, growth drivers.

And this stock has never been cheaper on all of these valuation metrics. Barely profitable before. How about this, very expensive on profitability metrics, on your price-to-earnings, your enterprise-value-to-EBITDA going into the pandemic has gotten a lot, lot cheaper on those, but also on the price to sales. If you look at it, I mean, trading at 17 times, trailing sales right now, used to be a lot higher when this thing first went public.

This is as cheap as it has ever been to buy Zoom stock. The question that you have to answer as an investor is, are they going to lose customers going forward? They haven't shown signs of doing that yet. In fact, they've been adding customers. Are the customers going to spend more or less overtime? Well, so far they're proving that they're spending more overtime. They have these additional services that they're really going to start ramping up in the coming year or two. I really think that this company has better-than-average growth going forward at the cheapest valuation it's ever been. Like I said, very highly profitable company with $375 million in free cash flow in the most recent quarter, so those sales are pretty valuable.

Matt Frankel: One thing I would say is that, the market misses about Zoom in comparisons to a Peloton and this is why we ranked it higher than a Peloton. It's like feeling Zoom has more staying power after the pandemic, because remote work is going away. Hybrid work is not. Companies are giving people the option. By remote work I mean offices are reopening. A lot of people are going to choose to continue to work remotely. Fool HQ is still close, but a lot of people I talk to say they're going to choose to continue to work remotely. A lot of people want to be in the office, but not every day. That's what makes these tools continuously valuable after the pandemic.

I think a lot of their growth was pulled forward. I think you're going to see growth fall off a bit over the next couple of years, it unpleasantly surprised the market in the past couple of quarters, with how much, I think it's slowed down, I think it's the reason I would point out as to the stock being so cheap right now. But I think this does have staying power, it makes something that was not fun, better.

Jason Hall: Zoom grew its business eight-fold in less than two years, guys. Eight-fold. I think what its customers have realized and what [CEO] Eric Yuan has realized along with them is the opportunity is these companies want to simplify their communications. They don't want 35 vendors. They want one throat to choke as the saying goes. One back to pat. And Zoom Phone I think is part of that unified platform. I think there are nailing it. I really think they are because it just works, it's just simple and it's just reliable. They move quickly when things aren't good. I think that's really important.

But I just did a quick and dirty valuation. Revenue is going to grow about 35% over the next year. Let's say revenue growth slows an averages 20% over the nine years after that so over the next 10 years. This is a five-bagger still, and that's if the valuation drops to like 15 times sales, which you think about its margin profile, and a company like Microsoft, one of these big software companies, there's not unreasonable. Let's say that's where it ends up. I mean that's a five-bagger from here, so that's why I ranked this as high as I did.