Is Zoom Stock a Solid Long Term Investment?


There are daily stock upgrades, downgrades, and new coverages by analysts. But there are some doubts in these Wall Street analyses. Today, we pick one of Wall Street’s high-profile stock and decipher whether it’s a worthy long-term investment. Living up to its name, Zoom Video Communications (NASDAQ: ZM), zoomed its way on the stock market, rising 72% and closing at $62 per share back in its April IPO. Today, the company is trading close to $80, turning into a more promising prospect for investors with signs of going even much higher in a year. But is Zoom Stock a substantial long-term investment? Here are vital pointers for your consideration as an investor.

Zoom’s Coverage Initiation

Being only eight years old in the market, Zoom began reporting its revenue a couple of years ago. Surprisingly, the video conferencing service provider is already skyrocketing. Its sales went beyond double between 2016 and 2017 and repeated the same in 2018. While there has been some minimal slow down since then, Zoom’s 95.7% year-over-year profits growth in Q2 2020 financial year was quite notable.

Zoom’s profits are on a climb too. For the first time in 2018, it announced its full-year GAAP profits of about $7.6million, and this is up to $12.9million GAAP profit on a trailing twelve-month basis. And this works out to about $0.08 per share in adjusted terms – 4X its proforma profit gained in fiscal Q2 2019. Moreover, Zoom has even more significant plans for its future.

Giving Out New Guidance

Zoom’s management has resorted to dishing out new guidance for the year according to its Q2 earnings released recently. Its sales soared up to 78% to $590 Million and quadrupling adjusted profits to $0.8-$0.19 per market share. While reviewing these results, Baird strongly believes that the company has a “massive” addressable market of individuals who could as well reap the benefits of reliable video conferencing. Baird is also impressed with how Zoom has quickly captured the market in a short period.

Apart from the Zoom video, the Zoom Phone service launched in January 2019 could become a powerful catalyst for growth. It can give way to a considerable frontier to replace legacy phone systems among consumers. The rollout of the cloud-based phone service was performing impressively, according to CFO Kelly Steckelberg in the Q2 conference call. The service has gained traction across all business segments, with almost 50% of Zoom Phone service having an annual revenue bigger than 100K.

Zoom Stock in the Wake of COVID-19 Outbreak

As Coronavirus fears continue negatively impacting most stocks today, Zoom’s share price is surprisingly soaring even higher. Its share price rose to a baffling 11% while the likes of S&P500 tumbled. As a videoconferencing provider, Zoom’s share price is on the rise as it assists individuals to work from home, especially with the possibility of lockdowns being announced. However, with the Q4 results out, is Zoom’s stock a long-term buy?

Zoom’s share price is expected to take full advantage of the assumption that more white-collar professionals will work from home in case the corona outbreak becomes severe. Telecommunication will be more popular as people stay and work from home, hence making Zoom stock a winner even though it’s highly overvalued, according to Rick Munarriz from Motley Fool.

While the Corona outbreak is causing businesses to consider teleconferencing solutions, other factors are leading to this too. Most white-collar professionals are finding the convenience of working from the comfort of their homes. Whether it’s Microsoft Teams, Google Hangouts, or Zoom, business meeting now doesn’t necessarily have to be held in a physical office. As more organizations adopt flexible working, Zoom is poised to benefit more. The company’s Q3 numbers recorded a rise in its revenue thanks to attracting new clients and expanding its services to the existing client base. After the Coronavirus becomes a thing of the past, thankfully, there will still be a need for teleconferencing technologies.

Zoom Stock is a Highly-Priced Name on the Market

The most intriguing thing perhaps, concerning Zoom is that even in the current market, it appears as the most expensive stock available. There are up to 269million diluted shares of the Zoom stock outstanding per its recent S-1. And this may mean market capitalization of Zoom stock of nearly $18billion. Yet the company generated just about $330million in revenue in its 2019 financial year ended on 31s January – a price-sales multiple of 55 according to Yahoo Finance. The company’s sales are proliferating as they recorded a double growth in the 2019 financial year. If assuming they grow to another 100% in the 2020 fiscal year, the company’s stock would still trade at around twenty-seven times its sales.

For many investors, 55 times revenue is merely ridiculous, but this is a multiple that qualifies Zoom stock as the industry’s untouchable. While it’s modestly profitable, the amount of growth priced in its current status triggers investors to expect nothing but perfection. At the very least, it appears as a multiple that may lack backing if the bull market tumbles. In case investors begin smelling the risks, Zoom Stock will probably become the first to take the plunge.

Watching the Market

The assumption at this moment is that numbers can add up, and maybe that’s what matters most. Pretty much any investor who’s tried to short SaaS Stock’s valuation in the past few years has been disapproved. Contrary to this, those paying more attention to the stock’s possibilities and not necessarily their multiples, have reaped big. For doubtful investors, there are no way valuations can keep on rising forever. And Zoom stock trading at multiple doubles days after the company’s IPO can turn to be the infamous canary in the coal mine.

Perhaps, but what the market proved in 2019 and previous years is that stocks with the ability to transform and command the market are sure to win buyers. For instance, SaaS Stocks performed impressively in the ugly markets of Q4. There are times when valuations rise too high. Until then, however, there is undoubtedly no reason why Zoom Stock cannot soar even much higher.

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