Jekyll and Hyde would be able to relate to Zoom Video Communications (ZM 0.21%). The stock was a market darling in 2020, with a return of 396% for the year. But 2021 was a different story. Zoom stock declined about 45.5% for the year and is currently down 64.3% from its 52-week high.
Which version of Zoom stock will we get in 2022? The future is far from certain. However, I have reason to believe that Zoom will be a breakout stock in 2022. Here's what investors need to know.
Image source: Zoom Video Communications.
Here's why Zoom stock is cheap
Zoom's business was growing before the COVID-19 pandemic. Full-year revenue was up 118% year over year for the year ending in January of 2019 (Zoom's fiscal years run to the end of January rather than the end of December), and up 88% in the fiscal year that ended in January of 2020. All of this growth was before the pandemic. So I don't believe it's fair to just call Zoom a "pandemic stock" -- this label doesn't give it credit for its superb growth prior to the pandemic.
However, it is fair to say that the pandemic was a major catalyst to Zoom's adoption. In the fiscal year that ended in January of 2021, the company's revenue was up 326% year over year, almost hitting $2.7 billion. You would be hard-pressed to find a faster growth rate at this scale.
The bears argue that Zoom will lose business as the world overcomes the coronavirus. And even bulls concede that Zoom's growth rate is slowing, and understandably so. Through the first three quarters of fiscal 2022 (the current fiscal year), the company's revenue is up 71% from the comparable period of last year. However, third-quarter revenue was only up 35% year over year, demonstrating how quickly the growth rate is dropping off.
Nevertheless, Zoom is profitable, free cash flow positive, and has a fortress of a balance sheet. And by these three metrics, Zoom stock has never been cheaper, as the chart below shows. Whenever a stock looks cheap, it's because investors have constructed a pessimistic narrative for the company going forward.
ZM PE Ratio data by YCharts
Here's why Zoom can keep growing
Remote work isn't likely to go away, which is why investors can expect businesses to continue to subscribe to Zoom's services. A September 2021 poll from Gallup found that 45% of the U.S. workforce was still working from home at least some of the time. And the majority of those polled said they want to keep working from home.
Upwork also did a study. Of course, Upwork stands to profit from remote work, so this isn't a source that's neutral on the subject -- take it with a grain of salt. But it found that 28% of U.S. workers will work remotely full time by 2025, which is far more than before the pandemic started. The takeaway here is that companies will continue needing a remote workforce management solution, making it likely they'll keep paying for their Zoom subscriptions.
That's the foundation of my argument for why Zoom will be a breakout stock in 2022 -- it will retain the business it already has. However, here's how I believe Zoom will keep growing and shock investors.
Zoom Meetings is the subscription product that you and I have most likely experienced. This product is your standard video-conferencing tool. However, the company has two other products -- Zoom Phone and Zoom Rooms -- that are far larger long-term opportunities. That's right, I said larger.
At Zoom's analyst day in September, management provided two case studies. Two customers started in fiscal 2019 with initial purchases of Zoom Meetings and Zoom Rooms. Just three years later, these two customers had increased their spending with Zoom by 470% and 500% by increasing their licenses for Meetings and Rooms, and by additionally purchasing Zoom Phone.
I'm not naive -- I recognize these two case studies likely represent a best-case scenario. But it does show growth potential nevertheless. And as of September, only 4% and 5% of Zoom customers had purchased Zoom Phone and Zoom Rooms, representing significant upsell opportunity, to say nothing of winning new customers.
I'll leave you with the kicker: Supposing workers increasingly return to the office, as many predict, this is the perfect time to upgrade physical office spaces. Zoom Phone updates the internal phone infrastructure whereas Zoom Rooms modernizes conference rooms. It might not make sense to spend money on these upgrades when your workforce is remote. But as employees return to the office, it makes a lot of sense.
Zoom Phone had triple-digit percentage growth in Q3, suggesting the trend has already started. I believe these two products will catalyze Zoom's growth in 2022, resulting in a stock that looks more like Jekyll and less like Hyde.
