Their businesses are growing, but Microsoft (MSFT 1.65%) and Zoom Video Communications (ZM 3.49%) stocks are both down significantly in 2022. Wall Street is more concerned about a slowing economy and rising interest rates, which might hurt these software specialists over the short term.
That shortsighted focus might create a buying opportunity for these stocks, which offer very different characteristics as investments. Let's look at which one seems more attractive to hold through the current industry slowdown.
Microsoft is more diverse
Microsoft easily wins the matchup when it comes to current operating and financial trends. The software giant's last earnings report showed a 16% sales increase through late September, while Zoom is growing at less than half that rate.
Microsoft is dealing with declining demand in a few niches, notably PC software. But its deeper portfolio is allowing it to better offset those weaknesses. Zoom, meanwhile, has to rely entirely on its enterprise communications segment to power growth as its consumer-focused platform shrinks.
Zoom trails on key financial metrics
There's also no real comparison between their relative financial strengths. Zoom is profitable, steadily booking over $1 billion of sales each quarter, and generating ample cash. That's much more than many other pandemic winning stocks can claim in late 2022.
But Microsoft trounces its peer across these key metrics. The company produced $23 billion in operating cash flow this past quarter alone. Its 42% operating profit margin is more than double Zoom's comparable figure. Microsoft can easily purchase a massive company like Activision Blizzard while still finding room to raise its dividend by 10%.
And keep in mind that the software titan is Zoom's primary competitor in the video conferencing niche. Zoom has to go up against Microsoft and other much better capitalized rivals as it seeks to expand its influence in the enterprise productivity space.
Valuation and outlook
As you might expect, those financial and growth differences have made for differing valuations on the two stocks. To own Zoom, you need to pay roughly 5 times annual sales while Microsoft is trading at 9 times sales. Microsoft is trading at its lowest valuation since mid-2020 while Zoom shares are trading well below their pre-pandemic levels.
That valuation slump only makes sense if you believe Zoom's best growth days are behind it. The company is seeing growing demand for its communications platform, after all, as enterprises keep shifting toward flexible and hybrid work processes. That segment grew 20% in the most recent quarter, or about as quickly as Microsoft's cloud services division did.
The better buy
Zoom's stock will look like a steal in a few years if the company can protect its market share while expanding its portfolio. New features coming online soon include mail and calendar offerings that are joining its popular digital phone features. On the other hand, the shares could easily underperform the market if enterprise IT budgets remain constrained for a year or longer.
Microsoft is the safer stock choice for many reasons, including its massive global sales base, industry-leading profitability, and growing dividend payment.
If you're willing to take on more risk in exchange for a bigger potential return, though, you might be swayed by Zoom's much lower valuation. It is a growing, profitable business, after all, with a good shot at capitalizing on the continued shift toward more internet-enabled work communication.
