Down 50% From Its High, Is Zoom Stock a Smart Buy?
Zoom Video Communications (NASDAQ: ZM) is a great example of the Gartner Hype Cycle in action. If you’re unfamiliar with the Hype Cycle, it depicts the perceived value of a new technology or trend over time. Generally speaking, expectations tend to be too high at first, then too low, before finding common ground somewhere in the middle.
Last year, the pandemic sent Zoom stock soaring 765% as it reached an all-time high of about $589 per share in Oct. 2020. Since then, the stock has crashed back to earth, falling over 50% from that peak. And while I certainly can’t say Zoom is done falling, I still think it’s smart to buy a few shares at the current price.
Image source: Getty Images.
More than a pandemic stock
Since the beginning of the pandemic, many people have become familiar with Zoom Meetings, the cornerstone of Zoom’s communications platform. This videoconferencing application allows users to engage and collaborate remotely, and it has played a critical role in connecting socially-distanced friends, families, students, and colleagues.
However, because COVID-19 put Zoom in the spotlight, supercharging its financial performance and stock price, many investors have labeled Zoom as a “pandemic stock.” That description implies the company will be less relevant once the pandemic is behind us, but I disagree.
According to research company Gartner, 48% of employees will work remotely at least part of the time after COVID-19, while just 30% worked remotely prior to the pandemic. Likewise, just 25% of enterprise meetings will take place in person by 2024, down from 60% in the past. In both cases, this suggests a lasting change in the workplace which Zoom is well positioned to benefit from.
Robust product portfolio
While Zoom Meetings remains its cornerstone product, the company now offers a robust portfolio of communications solutions. For instance, Zoom Rooms is a software-based conference room system designed to transform corporate offices into collaboration suites, creating a space where remote meetings can take place.
Likewise, Zoom Phone is a cloud phone system designed to eliminate costly onsite telecom hardware. This virtual system also allows clients to make and receive calls from a variety of devices (i.e. computers, smartphones, desk phones), meaning it’s more convenient and less expensive than traditional telecom options.
Collectively, these products make Zoom more than a videoconferencing company. Instead, Zoom offers a video-first unified communications platform as a service (UCaaS). And according to Nextiva, the UCaaS market will reach $141 billion by 2025. That puts Zoom in front of a massive market opportunity.
To bolster its offerings further, the company announced in July its intention to acquire cloud contact center specialist Five9 for $14.7 billion in an all-stock transaction. While this deal may fall apart as it has been met with criticism from certain analysts, I like Zoom’s initiative here. The deal would expand the scope of its UCaaS platform, adding $24 billion to its addressable market. Yet if this deal does fall through, I don’t think that would break Zoom’s investment thesis.
Image source: Getty Images.
Solid competitive advantage
According to Okta‘s 2021 Business at Work report, Zoom is by far the most popular videoconferencing application on the market. The product surpassed Cisco‘s Webex in Feb. 2018 in terms of total customers, and it eclipsed Webex in March 2020 in terms of unique users.
In fact, as of June 2021, Zoom Meetings had captured 50% market share, according to TrustRadius, and it’s actually the fifth-most popular enterprise application of any kind. That scale gives Zoom a significant advantage and reinforces the network effects that drive its business. In other words, Zoom is the most logical remote work solution for many enterprises, because it has a broader user base than any other product on the market.
Strong financial performance
One of Zoom’s greatest strengths is its customer-centric culture. CEO Eric Yuan left his former employer — which happens to be Cisco — because customers weren’t happy with Webex, and the company didn’t give him the freedom to build a more modern product.
From day one, Yuan prioritized customer satisfaction, and it remains the first tenet of Zoom’s growth strategy. That approach has translated into incredible financial results over the past two years.
Data by YCharts.
During the most recent quarter, Zoom’s top-line growth slowed significantly, rising just 54% over the prior-year period. This may have some investors worried, but I think the deceleration is a natural response to the hyper-growth the company achieved throughout the pandemic. Shareholders shouldn’t expect Zoom to post triple-digit growth quarter after quarter, but that shouldn’t be the reason you avoid the stock.
Currently, Zoom trades at 23 times sales. That means the stock is cheaper today than it has ever been (on a relative basis). And given Zoom’s strong competitive position, massive market opportunity, and founder-led management team, I think it makes sense to buy a few shares of this growth stock right now.
Just remember, no one knows the future, so it doesn’t make sense to buy your entire position at once. Instead, build a position over time through dollar-cost averaging.
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Trevor Jennewine owns shares of Okta. The Fintech Zoom owns shares of and recommends Five9, Okta, and Zoom Video Communications. The Fintech Zoom recommends Gartner. The Fintech Zoom has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.