Zoom Video Communications (ZM +2.25%) has given investors some frustration in recent years. The stock price is down more than 80% since the start of 2021, back when the coronavirus pandemic was still in many people's minds and "social distancing" was still a key phrase. Investors who have held on to the stock since the start of the pandemic likely lost all or most of the impressive gains the stock saw in 2020.
A decline in Zoom's value shouldn't have come as a huge surprise to investors given that a return to normal would mean less of a need for video-based communications. Plus, competitors like Microsoft (MSFT 0.54%) launched products like Teams and made it easier for users to find alternative videoconferencing options, which chipped away at Zoom's dominance.
Given the company's actual performance over that time, it appears overly punitive for Zoom stock to fall to pre-pandemic levels. Here's why this stock is a no-brainer buy at the valuation it's trading for.
NASDAQ: ZM
Key Data Points
Zoom's business isn't in bad shape
Like some other investors, I was doubtful whether Zoom could survive given the competition it faced. Microsoft Teams, for example, is a videoconferencing application offered as a "free" add-on to a Microsoft 365 subscription, which includes Word, Excel, and other popular office apps. Why wouldn't customers ditch a paid service like Zoom for one that is already included in a Microsoft 365 subscription?
But even though Zoom's year-over-year revenue growth isn't soaring, it continues to be positive (see chart below). Although it's not at the same levels as a few years ago, that growth rate was unsustainable to begin with. The fact that revenue hasn't fallen drastically is a testament to the strength and popularity of Zoom's service.
ZM revenue (quarterly YoY growth), data by YCharts; YoY = year over year.
As someone who has used both Zoom and Teams (and knows how frustrating the latter can be), I understand why Zoom still has a following. Even though Zoom might cost users more, it's the easier, smoother, and better videoconferencing application. This is further corroborated by Zoom's high net promoter score of 62, which beats the tech average of 58, and is higher than Microsoft, which has a score of 45.
Zoom's business is also profitable
As Zoom's revenue growth slowed, the company saw its margins shrink and eventually its bottom line fell into the red. But as the company cut costs and worked on efficiencies, it returned to profitability, reporting positive earnings in each of its three most recent quarters.
ZM profit margin (quarterly) data by YCharts.
It's important for growth investors to see that the company's operations are sustainable. And with positive earnings often comes strong free cash flow. In the trailing 12 months, Zoom has brought in more than $1.3 billion in free cash.
By accumulating free cash, Zoom can put it to work and potentially pursue acquisitions and growth opportunities. It's when a business is not growing and not generating free cash that investors should be worried. That isn't the case with Zoom.
Should you buy the stock?
Zoom's stock is trading at only 14 times its estimated future profits. It offers a lot of good value. Its product is proving to be resilient, even amid growing competition.
At a discounted price, the stock can make for a great buy; there's no reason it should be trading near the levels it was at in 2019. The business has evolved and become much bigger since then. Although its long-term prospects are uncertain, given its cheap valuation, Zoom is still a solid stock worth adding to your portfolio.
