Investing in growth stocks allows you to achieve a few important objectives. First off, it helps you to beat inflation, which is running at a 41-year high of 9.1%. Secondly, it also goes a long way to helping you build a robust investment portfolio for your eventual retirement. The recent bear market in the Nasdaq Composite Index opens up opportunities to accumulate stocks at attractive valuations as investors feel pessimistic about future growth.
Of course, you must separate the wheat from the chaff when selecting suitable investments to own for the long run. I look for companies with strong brands and business franchises that demonstrate a long runway for further growth, can capitalize on trends and catalysts, and are run by capable management teams. As long as these criteria are fulfilled, all you need is time for the market to recognize the quality of the business.
With this list in mind, Zoom Video Communications (ZM 0.05%) now qualifies as my top growth stock to buy, as its valuation has become more attractive in recent months.
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A surge in demand for remote communication
The pandemic played a major role in Zoom's growth over the past two years. Numerous lockdowns and movement restrictions around the globe meant that businesses had to rapidly digitalize and shift their business communications and work processes online to continue operations. Zoom's videoconferencing platform allowed a smooth transition to online work without major disruptions and has been a boon to a multitude of companies that scrambled to adjust to the crisis.
Aside from businesses, many people also used Zoom to safely keep in touch with loved ones, relatives, and friends. Zoom's software allowed people to continue their social lives and stay connected; it has been vital in helping with mental and emotional wellness during these trying times.
Even as the world recovers from the pandemic, many businesses have now acknowledged the attractiveness of a hybrid working model, allowing employees to have more work-life balance while completing their work tasks. Zoom is also an indispensable part of the communications flow, and the company's name has become a verb due to the surge in usage.
Robust financials
The company's numbers are a testament to its rapid growth. Zoom was already growing at a steady clip before the pandemic, with fiscal 2020 revenue (ended Jan. 31) nearly doubling year over year to $622 million. Net income came in at $21.8 million for that year. That fiscal 2020 revenue surged more than sixfold to $4.1 billion in fiscal 2022, while net income soared by 63 times its 2020 numbers to hit $1.4 billion, albeit from a low base. Customers with more than 10 employees also climbed from 81,900 in fiscal 2020 to 509,800 in fiscal 2022, while customers contributing $100,000 or more in trailing 12-month revenue rose fourfold from 641 to 2,725 over the same time span.
Zoom's share price may have fallen 45% year to date, but the company's numbers continue to impress. Fiscal 2023's first quarter recorded 12% year-over-year growth in revenue, enterprise customers saw a 24% year-over-year jump, and the trailing 12-month net dollar expansion rate for this group of customers stayed high at 123%. Net income halved year over year due to a bigger tax bill and higher expenses attributed to marketing and sales as well as research and development expenses. Free cash flow, though, remained healthy at $498 million, close to 10% higher than the prior year's $454.2 million.
Adapting well to the new normal
Investors may be fretting over Zoom's growth prospects in light of relaxed restrictions as the pandemic eases. There are indications that Zoom is transitioning well to the new normal as it taps acquisitions, software upgrades, and new releases to retain its customers.
Two months ago, the videoconferencing company acquired Solvvy, an artificial intelligence (AI) and automation platform, to improve its customer support functions by leaning on conversational AI. Solvvy's technology will be utilized to enhance Zoom's contact center offering to solve customers' issues more quickly and improve their overall experience.
Zoom has also expanded its collaboration with Genesys to enable its Zoom Phone service to deliver better customer experiences by tapping into the the latter company's cloud platform. Zoom is also launching new features to improve its cloud offering. Zoom Apps SDK provides developers with tools and resources to build Zoom apps for its clients, allowing for functions such as social networking, gaming, and team collaboration.
And just last month, a new package called Zoom One was released that combines chat, phone, meetings, and other features into an easy-to-use packaged offering. This software bundle also comes with translation and multi-language features to improve communications flow.
These new features may take awhile to gain traction, but Zoom has demonstrated its innovativeness in continuously improving its cloud offerings. With these new features and partnerships, the company should see its top and bottom lines steadily improve over time.
