Investors using the Robinhood Markets trading platform tend to be big fans of growth stocks, so it's not surprising to find Zoom Video Communications (ZM 0.15%) on the list of the 100 most widely held stocks among users on the stock trading app.
Zoom stock skyrocketed in 2020 as the videoconferencing app became an essential utility during the pandemic, but more recently the stock price has taken a hit. Share prices plunged 45% in 2021, and have continued to slide in the first weeks of 2022. However, nothing fundamental has changed about Zoom's business operations or performance. While its meteoric growth rates have slowed, the company is still in good shape to continue growing, and at its current share price, which is essentially where it was at the start of the pandemic, it looks like a good bet to beat the market over the long run.
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Zoom currently trades at a price-to-earnings ratio of just 31, making it only slightly more expensive than the S&P 500 at 26.
That's one reason to bet on it crushing the market. Let's take a look at a few others.
Remote work is here to stay
Unlike some other stocks that thrived during the earlier part of the pandemic like Peloton Interactive or Wayfair, Zoom hasn't experienced any real challenges now that most adults are vaccinated and have mostly returned to their pre-pandemic routines. Companies are still negotiating the return to the offices, but many companies and employees have been pleasantly surprised by the benefits of remote work. A survey from Reimagine Work a year ago showed that 52% of corporate and government employees favored a hybrid arrangement between remote and in-office with 11% preferring fully remote. In other words, only 37% wanted a full return to the office.
For the businesses that make up Zoom's customer base, remote work in one form or another is here to stay. Zoom has become an essential tool for remote communication, and that's unlikely to change after the pandemic as Zoom has replaced even phone calls for businesses in many cases.
Zoom has pricing power
Though Zoom faces competition from big tech companies like Alphabet, Microsoft, and Salesforce.com, the company is the clear leader in videoconferencing. A survey by EmailToolTester last March found that Zoom had roughly 50% global market share, well ahead of second-place Google Meet at 22%.
Unlike many of its cloud stock peers, Zoom is also highly profitable with an adjusted operating margin of 39% in its most recent quarter. That shows the company has both an outstanding business model and a sticky product that gives it pricing power. Its 50% market share is further evidence of that.
Companies that have built their videoconferencing ecosystem around Zoom will be reluctant to change to a different provider, and that gives Zoom pricing power, which is especially important for growing profits. That pricing power means the company can grow both through adding new customers and new products and from raising prices.
There are several growth opportunities ahead
Being the leader in video conferencing gives Zoom a natural path into further enterprise communications technologies like messaging and chat and to being a more diversified enterprise software company, providing a suite of services like Salesforce does.
The company showed its intention to move in this direction with its proposed acquisition last year of Five9, which makes cloud software for call centers. That deal was rejected by Five9 shareholders, though the stock price is down a third since then so they may have made a mistake with the rejection.
Still, it shows Zoom's intentions of being more of an all-encompassing software company and its track record of strong customer and employee satisfaction rating should help it move in that direction, making it easier for it to absorb acquisitions and for it to roll out new products for its customer base.
While Zoom may never post triple-digit revenue growth again like we saw in 2020, it's a mistake to think the company's best days are behind it. At a market cap of less than $50 billion now, the stock could easily double, especially considering its valuation and profitability. If it executes in new product releases and acquisitions, it still has 10-bagger potential even as it's underperformed over the last year.
