During COVID, you couldn’t tune into financial news networks without hearing about Zoom. The company and its stock was the poster-child for thriving businesses during lockdowns. On January 3, 2020, ZM share price closed at $67.28 per share. By October 16, just 10 months later, it had soared to $550 per share, an all-time high that still stands today.
By the time the broader market topped in November 2021, Zoom shares had already been cut in half to $220 per share. A 50% decline may have seemed like the company was trading at rock bottom prices but another 50% plunge subsequently took place to $110 per share.
And still the pain wasn’t over.
Bargain hunters who snapped up shares at that level saw their holdings drop by almost 50% yet again.
Now that the stock is trading almost 90% below its highs, is it time to buy? Or will yet another 50% haircut be on the horizon?
Zoom Price Multiples Are Increasingly Attractive
Zoom has a market cap of around $25 billion and trades at a 5x premium to sales. Its price-to-earnings ratio stands at about 20x currently. Neither of those multiples says the stock is cheap but equally neither would qualify as expensive for a company that has the historical and forecasted growth rates of Zoom.
Over the past 5 years, top line growth has been off the charts.
- 2018: 149.1%
- 2019: 118.2%
- 2020: 88.4%
- 2021: 325.8%
- 2022: 54.6%
Perhaps the most impressive number of them all is the smallest number of the bunch, 2022 revenues. After all that 54.6% growth rates was built on top of a staggering 325.8% figure in 2021.
What is catalyzing the massive growth trend?
Enterprise Sales: Key Growth Driver
Wall Street doesn’t reward growth per se. If a company is growing 10% year 1, 20% year 2 and 30% year 3, Wall Street will reward that company’s share price in year 3 but if growth rose 30% in year 1, 20% in year 2 and 10% in year 3, you could expect to see it punished. The rate of change of growth is what the Street cares about and Zoom has suffered from a declining rate of growth.
The slowdown is evident on the yearly numbers but most stark on the quarterlies.
- 2021 Q1: 368.8%
- 2021 Q2: 191.4%
- 2021 Q3: 54.0%
- 2021 Q4: 35.2%
- 2022 Q1: 21.4%
- 2022 Q2: 12.3%
- 2022 Q3: 7.6%
Growing revenues 7.6% to $1.09 billion is no mean feat but the deceleration is stark. Indeed the company has generated billion dollar plus sales for five straight quarters.
Enterprise sales are driving growth. In particular, customers spending six digits a year are up 37% year-over-year.
Another growth driver is Zoom Phone. Growth is eye-popping, even if from a small base. Zoom Phone customers are up 112% since the same quarter last year.
In its enterprise segment, the company’s key metric – net dollar expansion rate – is up to 120%, suggesting customers are not only sticking around but expanding their use of the product, a great sign for long-term Zoom investors.
What Now For Zoom?
For many who got swept up in the euphoria of buying work-from-home stocks, Zoom has proven to be a huge disappointment. The forecasts of endless of growth have been replaced by concerns that growth will slow to a complete standstill.
The reality is the assessment that work will go fully remote has proven inaccurate but virtual work remains a strong trend. Many companies offer hybrid work opportunities where employees can work from the office and home. To facilitate that policy, a platform like Zoom is needed. And Zoom is the best platform at scale.
The use-cases for Zoom are almost endless. Corporate connectivity is a major growth catalyst for Zoom but increasingly the massive education sector has transitioned to virtual classes also. A huge win for the firm was the adoption by a California UC to buy 15,000 Zoom Phone seats. Is that the start of a major trend across Universities domestically and internationally?
What does it all translate to from a valuation standpoint?
We see Zoom having massive upside potential from here. Running cash flow projections, we assess the upside opportunity for Zoom to be $126.14 per share, representing 55.5% upside from current levels.