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Only a couple of years back, perhaps no one could have envisioned that we would be talking about Zoom Video Communications (ZM) today as a value stock. However, the former “stay-at-home” winner peaked in 2020, and currently trades at a tiny fraction of its all-time highs.
To be sure, it wouldn’t be fair to single out Zoom here. Most other market darlings of the COVID-19 pandemic era - including names like Teladoc (TDOC), Peloton (PTON), and Chegg (CHGG) - also trade way below their all-time highs and have been underperforming the markets, just like Zoom stock.
That said, I believe at these prices, Zoom stock looks like a cheap value name worth betting on.
Zoom Stock: How the Company Lost Its Growth Momentum
A cursory look at Zoom’s financial report tells us what’s wrong with the stock. The company’s revenues rose 88.3% in its fiscal year 2020, which was followed by a 325% rise in the next year.
However, the revenue growth slowed down to 54.4% in the next year, and decelerated even further to 7.1% in the fiscal year 2023. In the fiscal year 2024 (ended Jan. 31), Zoom’s revenue rose a mere 3.1%. In the fiscal fourth quarter, revenues rose by a dismal 2.6%, but that was still better than analysts' consensus estimates – highlighting the low expectations for the company.
As is the case with other stay-at-home winners whose business blossomed during the pandemic, Zoom effectively benefited from the restrictions on physical movement of people.
Names like Amazon (AMZN) and Meta Platforms (META) also went through a period of severe growth slowdown post-2021, with the Facebook parent reporting its first-ever revenue decline in 2022. However, while their growth has since rebounded - albeit not at the same rate as it was during the pandemic - Zoom’s topline growth is now languishing in the low single digits. Things are not expected to get better anytime soon, and Zoom’s revenue guidance for the current fiscal year implies a growth of 1.6%.
Meanwhile, even as Zoom’s current growth is less than a percent of its heyday during the pandemic, its performance on profitability and cash flows has improved greatly.
Zoom Is a Free Cash Flow Engine
During the fiscal year 2024, Zoom reported a net income of $637.5 million, which was up over six-fold compared to the previous year. For the current fiscal year, the company forecast adjusted earnings per share (EPS) between $4.85 and $4.88, as compared to $4.37 in the previous year. While Zoom’s topline growth has slowed,the company’s performance on the bottom line has been quite impressive.
Even more remarkable has been its cash flows, as ZM generated free cash flows of $1.47 billion in the last fiscal year – up 24.1% YoY. For the current fiscal year, the company expects free cash flows between $1.44 billion-$1.48 billion.
Thanks to the stellar free cash flow generation over the last several quarters, Zoom had cash and cash equivalents of $7 billion at the end of January, with no long-term debt on its balance sheet. For context, the cash on Zoom’s balance sheet is more than a third of its current market cap.
The company did announce a $1.5 billion share buyback, which would extinguish around 7% of its shares - but given the projected free cash flows, the cash on its balance sheet should be similar to the current levels at the end of the current financial year, even with the share repurchases.
Zoom’s Valuation Looks Quite Attractive
Zoom stock looks attractive based on almost all the usual metrics. Here’s a brief analysis of various valuation metrics.
- Zoom’s next 12 months (NTM) enterprise value to earnings before interest tax, depreciation, and amortization (EV-to-EBITDA) is only 7.42x.
- Zoom trades at an NTM price-to-earnings (PE) multiple of 13.6x.
- The company’s NTM free cash flow to market cap multiple is 13.7x.
To be sure, the valuation multiples are low for a reason, which is the company’s sagging growth. However, analysts expect the current fiscal year to be the bottom in terms of growth slowdown, and predict 4% revenue growth in the fiscal year 2025. While the expected growth is still not stellar, it does signal a bottoming out.
Also, despite the $1.5 billion share buyback, Zoom continues to look for acquisition targets to spur growth. During the Q4 earnings call, CFO Kelly Steckelberg emphasized that “having an (buyback) authorization in place does not preclude us and still provides us plenty of flexibility to do M&A transactions that we might see as exciting in the future. And we continue to look for any opportunities that make sense to bring another organization to the Zoom portfolio.” The company is also expanding its artificial intelligence (AI) capabilities to retain and acquire new customers.
On the flip side, though, Zoom is facing trouble retaining customers. In fiscal Q4, its trailing 12-month net dollar expansion rate for Enterprise customers fell to 101%, which is 14 percentage points lower than the corresponding quarter in the last fiscal year. The company is specifically facing tough competition from Microsoft (MSFT) Teams.
ZM Stock Forecast
Wall Street analysts have given ZM stock a consensus rating of “Hold.”
Of the 25 analysts covering the stock, only 5 rate it as a “Strong Buy” or “Moderate Buy,” while 2 rank it as a “Strong Sell.” The remaining 18 analysts rate ZM as a “Hold,” while the stock’s mean target price of $77.10 is 16% higher than yesterday’s closing price.
ZM is not the same growth story as it was in 2020, when optimism over the company led to a rally in its namesake Zoom Technologies - which was an obscure Chinese company whose price action even invited an intervention by the SEC. However, while Zoom Video Communications stock looked compelling as a growth name in 2020, it looks like a good value name worth considering in 2024, given the tepid valuations and cash-rich operations.
On the date of publication, Mohit Oberoi had a position in: TDOC , CHGG , PTON , AMZN , META , MSFT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
