The 2020 lockdowns pushed people and businesses to embrace interacting via video, and Zoom Video Communications (ZM -0.98%) became a hot stock as the word "Zoom" became the "Kleenex" of videoconferencing. The stock soared to more than $500 per share before collapsing to just around $120 as investors began looking beyond the pandemic.
Such a sharp drop might imply that Zoom's business success was temporary, but I don't think that's the case. The company has the fundamentals needed to continue growing over the coming years. Here is what investors need to know before looking past this underappreciated tech stock.
Far more than a flash in the pan
Zoom offers a free basic plan, which is how the company became so mainstream during COVID-19. It sells paid plans with more capacity and features aimed at enterprises that host team meetings and webinars or need more extensive features. Its products range from basic video calls to transcript recording, cloud-based phone systems, and more.
Image Source: Getty Images.
Yes, Zoom benefited from the pandemic. Growth peaked in early 2021 when revenue grew 369% year over year in the company's fiscal 2021 fourth quarter, which ended Jan. 31, 2021. Lockdowns prevented many companies and people from physically interacting, and many had to quickly adapt, so they signed up for Zoom's products and services. This "pulled forward" a lot of Zoom's near-term growth.
Fast-forward one year, and revenue grew just 21% in Zoom's fiscal 2022 Q4. However, when you're coming off of 369% growth the prior year, managing 21% growth on top of that seems more impressive!
But for those who claim COVID-19 was the only reason for Zoom's growth, I refer you to the chart below. Zoom was growing just fine before the pandemic, growing revenue 88% year over year in fiscal 2020, which ended on Jan. 31, 2020, before COVID emerged in the United States.
ZM Revenue (Quarterly YoY Growth) data by YCharts.
It's fair to state that revenue growth is slowing post-lockdowns, but I would push back on the idea that Zoom depended entirely on the pandemic. The numbers just don't support that narrative.
Investors will need to see how growth continues once these tough comparables are behind the company. There are promising signs, like its 130% net revenue retention rate among enterprises, which indicates that Zoom can upsell and grow customers once they begin doing business together. Zoom also increased its number of customers paying $100,000 or more by 66% in its most recent quarter, another potential sign of upcoming growth.
Zoom is a cash cow
Investors can focus so much on Zoom's revenue growth during the pandemic that they miss the financial impact the pandemic had. Zoom's business is profitable, turning about $0.35 of each revenue dollar into free cash flow. The surge in revenue growth put a ton of money on Zoom's balance sheet, which now stands at $5.4 billion in cash and short-term equivalents and no debt.
ZM Free Cash Flow data by YCharts.
Management has tons of options to create value for shareholders at this point. It tried to acquire Five9 for $14.7 billion in stock to get further into call centers, but Five9's shareholders voted against the deal. While the acquisition didn't work out, Zoom has shown a willingness to strike a deal if the right one comes along.
Additionally, management authorized up to $1 billion in share repurchases in March, which will give Zoom the ability to lower its share count and increase earnings per share (EPS) as it sees fit.
The stock's cheaper than ever
Share repurchases can be especially beneficial to shareholders when the stock is cheap, giving management more "bang for the buck" in retiring shares. Zoom's decision to repurchase shares could be influenced by its dramatic fall from its highs.
You can see in the chart below that whether you go by profits via Zoom's price-to-earnings ratio or by revenue with the price-to-sales ratio, the stock is the cheapest it's been since going public in 2019.
ZM PE Ratio data by YCharts.
It would be one thing if Zoom were losing money or if revenue growth turned negative coming out of lockdowns, signs that the company's success was a mirage, a dream that investors were waking from.
However, Zoom is still growing, extremely profitable, and flush with cash while carrying zero debt on the balance sheet. The low valuation gives investors more upside, likely letting all of Zoom's future growth show up in the share price as investment returns. Quality companies are always a good buy at a fair price, but Zoom seems like a table-pounding buy at a great price.
