Zoom Video: Why I Maintain My Sell Rating NASDAQ:ZM

This concretely shows that Zoom is no longer a high-growth business. Consequently, it won't be rewarded with a premium valuation on its stock. In addition to that, I don't think Zoom is currently trading at an attractive-enough valuation — investors who are still excited about the stock may be wise to wait for a larger decline before considering an investment. Zoom's valuation has surely contracted, but it's still not desirable when observing the company's peer group. Today, Zoom is trading at 31.6 times earnings, whereas top competitors like Cisco (CSCO -2.45%), Microsoft (MSFT -0.76%), and Alphabet (GOOGL -6.83%) (GOOG -6.65%) are trading at price-to-earnings multiples of 20, 31, and 24, respectively. Given the expected slowdown in Zoom's growth, I think it's safe to say that the company is still trading at expensive valuation multiples.

  1. In light of revenue variation of popular Peter Lynch's earnings line for the projection of probable per share values of the company, I see Zoom Video's IPO as very attractive.
  2. And the outlook for ZM stock is tied to whether the company morphs into a broader business communications platform.
  3. Unlike many other fast-growing tech companies, ZM is GAAP profitable and earned $316.9 million in net income for $1.04 in earnings per share.
  4. Earlier in September, The Wall Street Journal reported that a U.S.
  5. It has been a while since I last covered Zoom, the company behind one of the world’s largest videoconferencing platforms, here on Seeking Alpha.

As a result, according to a study by Upwork, 22% of all Americans will be working remotely by 2025, which translates to 36.2 million people, up 87% from 2019 levels. This research shows that the remote working trend is here to stay and may only increase going forward, which bodes well for Zoom as demand for its platform will remain and most likely grow over time. Further, Zoom stock holds an IBD Composite Rating of 83 out of 99. Shares currently have an IBD Relative Strength Rating of 50 out of a best-possible 99. Also, Zoom reported 3,731 customers contributing more than $100,000 in trailing 12 months' revenue, up 13.5% year over year. A "Zoom Meeting" refers to a videoconferencing session hosted on its cloud infrastructure.

Nasdaq

Given Zoom's current prospects, I do not believe this stock offers investors a compelling risk-reward. Therefore, I remain neutral on this name, as I've been for a while. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Luke Meindl has no position in any of the companies https://bigbostrade.com/ mentioned.The Motley Fool owns and recommends Alphabet (A shares), Cisco Systems, Microsoft, and Zoom Video Communications. Zoom still expects the deal to close in the first half of next year. It's just another potential speed bump as Zoom tries to keep expanding beyond its role during the pandemic.

Management has projected revenue of more than $4 billion and earnings of $4.77 per share this fiscal year. That would even further depress the above ratios despite Zoom growing sales 51% and profits 43% year over year. If it can maintain growth, Zoom will look like a steal in hindsight. After spending much of 2020 at or near an all-time high, shares started dropping in the fall of last year. It's pushed the price-to-sales and price-to-earnings ratios to all-time lows.

Ranging from #1 (Strong Buy) to #5 (Strong Sell), the Zacks Rank system has a proven, outside-audited track record of outperformance, with #1 stocks returning an average of +25% annually since 1988. Over the past month, the Zacks Consensus EPS estimate remained stagnant. As of now, Zoom Video Communications holds a Zacks Rank of #1 (Strong Buy).

IPO: At What Price Is It Wise To Buy Zoom Video?

The company is scheduled to release its next quarterly earnings announcement on Monday, February 26th 2024. Sign-up to receive how to invest in the ruble the latest news and ratings for Zoom Video Communications and its competitors with MarketBeat's FREE daily newsletter.

In Q3, total revenue came in at $1.14 billion, up 3% year-over-year, bringing the YTD growth to 3.2%, a slowdown from the 7% growth reported in its fiscal FY23. Still, this is better than I anticipated, primarily due to the business showing to be stickier than expected and management’s rollout of new features, adding new revenue streams. The company has outperformed my expectations in terms of development, allowing for some careful optimism in my eyes. However, I do still expect a slight market underperformance from Zoom. As discussed earlier, the outlook for the videoconferencing industry is very solid, with growth at a CAGR of low-double digits. Yet, I did not expect Zoom to be able to fully benefit from this growth.

So I wouldn't be too quick to presume that just because Zoom holds a massive war chest, that they are good capital allocators knowing how to return capital to shareholders. Another challenge is the evolving competitive landscape, particularly in the realm of AI features. While Zoom has introduced an AI companion with features like meeting summaries, there is acknowledgment of the need to differentiate these offerings from competitors.

Zoom Is Down 88% From Its All-Time High, Is Cathie Wood Still Right About This Once Unstoppable Stock?

However, concerns persist, particularly in terms of market share losses, persistent stock-based compensation (SBC) expenses, and the company's high reliance on M&A for future growth. Looking ahead, Zoom's guidance for Q4 reflects a slowdown in growth, indicating ongoing challenges. Analysts and investors alike will be keeping a close eye on the performance of Zoom Video Communications in its upcoming earnings disclosure. The company's earnings per share (EPS) are projected to be $1.15, reflecting a 5.74% decrease from the same quarter last year. Meanwhile, our latest consensus estimate is calling for revenue of $1.13 billion, up 0.97% from the prior-year quarter.

Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Zoom emerged as one of the winners of the COVID-19 pandemic as its share price skyrocketed to over $500 per share. Today, the share price has come down to around $70 per share as investors realized that the COVID-19 tailwinds boosting growth for Zoom were not here to stay, resulting in a somewhat weak growth outlook for the company.

Historical Prices for Zoom Video Communications

Management has already indicated that it is not planning to leverage its significant cash position to buy back shares. Management is entirely focused on investing in the business and is likely to look at smaller tuck-in acquisitions and larger ones. The gross margin in Q3 was 79.7%, up 20 basis points YoY and slightly below the level achieved in the first half of the year. Still, considering weakness, this is a strong gross margin performance.

For the current quarter, Zoom predicted adjusted earnings of $1.14 a share on sales of $1.13 billion. Analysts had been looking for earnings of $1.09 a share on sales of $1.13 billion in the fiscal fourth quarter. Investors should also note that ZM has a PEG ratio of 0.41 right now. The PEG ratio bears resemblance to the frequently used P/E ratio, but this parameter also includes the company's expected earnings growth trajectory. The Internet – Software industry currently had an average PEG ratio of 1.74 as of yesterday's close. Due to the presence of equity-based compensation, ZM earned an even greater free cash flow amount of $455 million, which helped bolster its now $5.1 billion cash hoard.

At current prices, ZM is trading at around 22x this year’s revenue estimates. Wall Street’s average rating is 3.92 out of 5, suggesting mild bullishness. Zoom Video Communications (ZM) late Monday beat expectations for its fiscal third quarter, but offered mixed guidance for the current period. While I am in favor of this strategy on many occasions, I am not sure in this situation as it leaves investors highly exposed to the significant levels of SBC. Furthermore, as a result, GAAP EPS remained much lower at just $0.45, indicating that SBC continues to take up 66% of non-GAAP net income, which is significant.

דילוג לתוכן