The early superstar of the coronavirus lockdowns and the subsequent remote world has lost its shine.
Zoom Video Communications, Inc.
ZM
has tumbled over 40% since its October highs as Wall Street dumped the stock in anticipation of the economic reopening.
Despite the fact that more people are returning to offices amid the successful vaccine rollout, Zoom is still projected to add another billion dollars to its top-line this year. So let’s dive into ZM before its first quarter FY22 financial release on Tuesday, June 1 to help investors decide if they should consider buying the beaten-down cloud video communication company, or at least put it back on their radars.
Zoom’s Post-Pandemic Pitch
The utility of Zoom’s easy to use cloud-based video communication platform was on full display during the height of the pandemic as people who could work remotely and students all joined seemingly overnight. It’s worth remembering ZM was also growing long before the pandemic and it went public about a year before the initial coronavirus lockdowns, with revenue up roughly 90% in FY20 (period ended Jan. 31, 2020).
More people are currently returning to offices and schools will hopefully be completely in-person by the fall. And many family and friend Zoom calls ended a long time ago. This is all part of the reason for the selloff, along with its insane run that took ZM from $70 last January to $275 by July—and that’s before things really heated up.
All that said, the end of Zoom happy hours is largely irrelevant since it makes money from its paying business clients. Plus, the remote work world is likely here to stay in some capacity even as major cities reopen amid the impressive vaccine rollout.
Big companies throughout the country are slowly bringing back their employees to offices. But many are introducing hybrid environments, where people come in two to three days a week. The company also allows businesses to cut back on travel, which was a pitch it was making before it went public. Even as things return far closer to normal in the U.S., international business travel could take years to recover.
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Furthermore, the U.S. economy was already bouncing back before the vaccine, even amid the heart of the pandemic because so much work is done digitally. Countless jobs are done nearly all on computers and the proliferation of business software, SaaS, cloud computing, and more have made the work-from-anywhere world possible.
The changing environment is a big reason why Salesforce
CRM
plans to buy work-focused communication platform Slack
WORK
for roughly $28 billion, which is the second-largest in software history. Zoom has also expanded its portfolio from a videoconferencing app to a more complete communication platform that includes Zoom Phone.
Cloud-based phone solutions are quickly becoming popular in the business world. And the goal is to have a unified place for calls, video, meetings, chat, and more.
The company also announced on May 19 its new Zoom Events platform that “combines the reliability and scalability of Zoom Meetings, Chat, and Video Webinars in one comprehensive solution for event organizers, with the ability to produce ticketed, live events for internal or external audiences of any size.”
Price Movement
Zoom has soared 320% in the last two years, but the tides changed in the fall as Wall Street took a big step back and sold the stock that had gone too far too fast. ZM is down about 40% from its October records of over $550 a share. This lags the broader Zacks Tech sector’s 20% run during that stretch.
Other high-flying stocks have come back to Earth since the Nasdaq started its fall into a technical correction in February. In fact, Tesla
TSLA
is down about 12% in 2021 vs. Zoom’s 3.5% downturn. The pullback has pushed the stock below key technical levels. Luckily, ZM has flashed some signs of life recently, popping above its 50-day moving average, with its shares up 17% since May 13. The stock closed regular trading Thursday at $326 a share.
The recement jump has seen it move above neutral RSI levels (50) at 56, up from nearly oversold territory of 30 it hit prior to its recent comeback.
Despite the 40% haircut, ZM still trades at 140X forward 12-month earnings, which is sky-high but marks a huge discount to its year-long median of 250X. Meanwhile, Zoom trades at 23.6X forward sales. This represents a 33% discount to its own year-long median and a nearly 70% discount to its own highs.
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Other Fundamentals
Zoom boasts a solid balance sheet and it decided to beef up its cash position through a secondary stock offering back in January. The videoconferencing firm raised $2 billion, selling shares at $340 each, which came in well above its $1.5 billion to $1.75 billion goal.
Zoom wanted to maintain what its CFO called “optimal flexibility for our balance sheet.” ZM ended fiscal 2021 (ended Jan. 31) with $4.2 billion in cash and equivalents and $5.4 billion in total assets vs. $1.4 billion in total liabilities.
ZM’s fiscal 2021 revenue soared 326% from $622 million to reach $2.65 billion, with its Q4 sales up 370% to $883 million. More specifically, ZM’s customers with more than 10 employees skyrocketed 470% to 467,100, while its users contributing over $100,000 in trailing 12-month revenue surged 156%.
The company has also topped our adjusted earnings estimates by an average of 73% in the last four quarters, with its Q4 EPS up from $0.15 to $1.22 a share.
Cleary last year’s unprecedented environment helped Zoom post mind-boggling expansion that creates tough comparisons. Nonetheless, Zacks estimates call for ZM’s FY22 revenue to climb another 43% to $3.8 billion, adding another $1.15 billion to the top-line. The firm’s FY23 sales are then projected to jump 20% higher to reach $4.6 billion.
The possibility of going from $622 million in sales before the pandemic to $4.6 billion next year is quite impressive. Plus, its adjusted earnings are expected to climb by 10% and 8%, respectively. And its bottom-line outlook has jumped since its Q4 report.
Bottom Line
Zoom’s positive adjusted EPS revisions help it land a Zacks Rank #2 (Buy) at the moment, alongside its “A” grade for Growth in our Style Scores system. And eight of the 18 brokerage recommendations Zacks has for the stock are “Strong Buys,” with eight more “Holds” and only one “Sell.”
Zoom is set to report after a long holiday weekend and volume has already started to slow down as we enter the summer. And playing any stock for near-term gains around earnings is risky.
Yet, investors with longer-term horizons might want to add ZM back to their watchlists, as the beaten-down cloud communication firm stands to grow in our digital world. It’s also worth remembering the S&P 500 has returned near its highs after the recent inflation pullback and the Nasdaq has recovered to pop back above its 50-day moving average.
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