To say this has been a difficult year in the stock market would be an enormous understatement. The pain has been particularly acute for those of us who invest in businesses while they're still in their high-growth phases. The iShares S&P 500 Growth ETF has fallen by 26% in 2022.
High inflation and the actions being taken by the Federal Reserve to curb it are starting to take a heavy toll. For example, companies are rapidly cutting back on advertising -- as evidenced by Snap's recent walk back from the guidance it just provided in April.
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Panicking investors can find it hard to discern between their best and worst stocks, and may simply sell the whole lot. As a result, the share prices of great businesses with bright futures are falling along with the more troubled ones.
At the moment, there's a top growth stock down by 46% since the end of 2021. Its stock chart might frighten off most investors, but the path ahead of the company looks much smoother than its stock performance suggests. Here's why this champion of the stay-at-home era looks like a great stock to buy right now.
Zoom Video Communications is a growth stock trading at a value stock price
Zoom Video Communications (ZM -1.42%) recently shared a highly encouraging fiscal first-quarter earnings report, but investors fleeing growth and tech stocks hardly noticed. Though there's a lot less need for virtual meetings now that fewer people are working and taking classes from home, its revenue rose 12% year over year to $1.07 billion during the period, which ended April 30.
Further, despite this being a historically tough time to be making year-over-year comparisons, free cash flow rose 10% to an impressive $501 million. That works out to an outstanding 47% of total revenue.
At its now-reduced stock price, Zoom Video trades for just 19.7 times free cash flow. This is an appropriate multiple for a business growing a little slower than the pace Zoom recorded for its fiscal first quarter. Fortunately for long-term shareholders, the business is actually growing much faster than last quarter's comparisons suggest. Over the past three years, total revenue has climbed by a stunning 635%.
Another pandemic or a resurgence of COVID-19 due to a new variant could send businesses rushing back to work-from-home solutions, but the next two years probably won't be nearly as exciting as the last two for Zoom. Now that the stock is trading in value territory, though, the company could produce market-beating gains by continuing along at its recently stifled pace.
A screaming buy now
Zoom Video looks like one of the best beaten-down growth stocks to buy now because its pace of growth will probably accelerate in the quarters to come. Enterprise customers with deep pockets are beating a path to its door. At the end of April, it had almost 200,000 enterprise customers -- 24% more than it had a year earlier.
And those enterprise clients aren't cutting back on their spending with Zoom now that more of their employees are returning to their offices. As of the end of April, recurring revenue from enterprise customers was up 23% year over year. Also, the number of enterprise clients contributing more than $100,000 annually to Zoom's top line was up by 46%.
You're most likely familiar with Zoom's app for holding virtual meetings, but you may not realize how valuable its more recently launched communications services are for its enterprise customers. Zoom's new contact center offering employs conversational artificial intelligence to automate as many calls as possible. Now, businesses that want to provide first-rate customer service no longer need to invest in their own contact centers, and you might be surprised by the size of some of its clients. In its fiscal first quarter, Zoom signed contact center deals with major U.S. health insurer Humana and rental car giant Avis.
Zoom Phone is a unified communications application that combines messages and phone calls with video on mobile devices and desktops. Features that allow management to monitor all employee communications with customers, whether they use text, audio, or video, are a corporate trainer's dream come true. Zoom Phone didn't launch until 2019, but enterprise customers are already paying for subscriptions that cover 3 million individual employees.
Zoom Video might never experience another huge lift like it did when COVID-19 restrictions and social distancing efforts swiftly locked millions of workers out of their offices. With plenty of enterprise clients sticking around and expanding their relationships with the company, investors can anticipate years of market-beating gains from this beaten-down stock.
