Sometimes, you must admit defeat in the investing world. I recently did that with my Zoom Video Communication (ZM 1.57%) shares, as I have completely sold out of my position. Unfortunately, this sale was at a loss, but there's a reason I'm OK with taking a loss on this investment.
Please continue reading to discover why I decided to move on and where I think better opportunities are available.
Zoom's future is not as bright as other investments
Unlike many investors, my first purchase of Zoom stock wasn't in 2020 before the stock spiked; it was in mid-2022 after the stock had crashed. At that time, Zoom was trading for around $120 per share and carried a reasonable price tag of around 25 times earnings. My thesis was simple: "Zoom Video is too cheap for its widespread use and strong profit margins." I thought that with its massive cash hoard, it would aggressively repurchase stock, boosting its earnings per share and lowering its valuation further.
But I was wrong.
Instead of maintaining margins, Zoom's operating expenses drastically increased, and the relatively small share repurchase program was quickly outdone by its significant stock-based compensation expense.
ZM Operating Margin (TTM) data by YCharts.
Additionally, its revenue growth has practically stopped, with the second quarter of fiscal year 2024 revenue only growing 3.6% year over year. Wall Street analysts aren't expecting Zoom's environment to improve either, as revenue is only expected to grow by 4% in fiscal year 2025.
I also underestimated how quickly the work-from-home trend would die out. While many companies still offer this as a benefit, many that championed work-from-home have reversed their stance and required employees to come into the office more often.
These factors combined made me realize that Zoom's growth prospects were eliminated. Furthermore, with the stock essentially flat for the year, I realized I missed my opportunity to recover some of my losses if I had just sold my Zoom shares and bought something that I knew was undervalued entering 2023.
So, what will I do with my cash now that I've sold my Zoom shares? Well, I have a few options.
I'm not going to sit on the cash
While the tech sector isn't as cheap as it used to be, there are still a few companies in this market that aren't terribly expensive. Furthermore, with the rise of artificial intelligence (AI) interest, I'd like to increase my exposure to that space. UiPath (PATH 0.26%) comes to mind, as its robotic process automation integrates nicely with AI models. In fact, it's one of Cathie Wood's top picks in the AI space.
Another realization I had is that I'm over-exposed to the tech industry. While it's one that I know much better than others, it's known to go through boom and bust cycles more often than practically any other sector. As a result, some of the cash from the Zoom sale will be used to purchase a company or two in the utility sector, as I have no exposure there. One that I've got my eye on in particular is NextEra Energy (NEE -1.36%), a Florida-based utility company that happens to be the leader in renewable energy.
With my purchase of these two, I'm attempting to learn my lesson of not buying a stock just because it's cheap and that sole reliance on companies maintaining their status quo isn't a winning strategy. While I may have lost money on my Zoom investment, the lesson I have learned is invaluable and will undoubtedly save me from making a worse investment somewhere down the road.
