On March 16, Zoom Video Communications, Inc. (ZM) announced a first-of-its-kind partnership with Major League Baseball (MLB) to enhance the viewership experience as the new Official Unified Communications Platform of the league.
We also have reason to believe that the stint of this stock, which has hit home runs during the pandemic, is far from over.
As a video communication platform provider, ZM connects people through video, phone, chat, and webinars, enabling experiences across disparate devices and locations.
ZM’s fourth-quarter financial performance exceeded expectations. Its management also issued a rosy earnings outlook for the new fiscal year.
The stock has dipped 3.5% over the past month to close the last trading session at $71.85.
Let’s discuss what makes it worthy of investment.
Healthy Track Record
Over the past three years, ZM’s revenue increased at a 91.8% CAGR, while its EBITDA has grown at a 124% CAGR over the same time horizon.
Moreover, ZM’s net income also increased at a 60% CAGR over the past three years.
Robust Financials
For the fiscal fourth quarter (ended January 31), ZM’s revenue came in at $1.12 billion, up 4.3% year-over-year. The company’s gross profit increased 1.2% year-over-year to $823.45 million during the same period.
ZM’s non-GAAP income from operations for the quarter came in at $404.83 million, while its non-GAAP net income came in at $366.55 million, or $1.22 per share.
For the fiscal year (ended January 31), ZM’s revenue came in at $4.39 billion, up 7.1% year-over-year. The company’s gross profit increased 8.1% year-over-year to $3.29 billion during the same period.
ZM’s non-GAAP income from operations for the quarter came in at $1.58 billion, while its non-GAAP net income came in at $1.33 billion, or $4.37 per share.
ZM’s total assets stood at $8.13 billion as of January 31, 2023, compared to $7.55 billion as of January 31, 2022.
Impressive Profitability
ZM’s trailing 12-month gross profit margin of 74.95% is 49.4% higher than the industry average of 50.17%.
Moreover, ZM’s trailing-12-month ROTC and ROTA of 2.52% and 1.28% compare favorably to the respective industry averages of 1.97% and 1.09%
Attractive Valuation
ZM’s forward P/E of 17.09x is 17.4% below the industry average of 20.69. Similarly, its forward EV/EBITDA multiple of 9.24 is 31.8% below the industry average of 13.54.
Moreover, ZM’s forward Price/Book multiple of 2.84 also compares favorably with the industry average of 3.64.
Optimistic Outlook
Analysts expect ZM’s revenue for the fiscal ending January 31, 2024, to increase 1.5% year-over-year to $4.46 billion, while its EPS is expected to come in at $4.20. Both metrics are expected to keep increasing over the next two fiscal years.
Moreover, ZM has surpassed consensus EPS estimates in each of the trailing four quarters.
POWR Ratings Reflect Robustness
ZM’s fundamental strength is reflected in its overall B rating, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. ZM also has a B grade for Value and Quality, owing to its lower valuation and higher profitability than its peers.
ZM is ranked #26 of 81 stocks in the Technology - Services industry.
Beyond what has been discussed above, additional ratings for Growth, Stability, Sentiment, and Momentum of ZM can be found here.
Steps in the Right Direction
As part of ZM’s partnership with MLB, the umpires will connect with the audience using Zoom Replay Operations Center utilizing Zoom Contact Center for the reviews. On MLB Network and AppleTV+, viewers will see Zoom Replay Operations Center live, where an expert will discuss the review.
In addition, the Zoom platform will be used to deliver confidential information about the 2023 MLB draft on day one, while MLB teams will use Zoom Phone to connect with colleagues and Zoom Contact Center to interact with fans.
During the fourth quarter of fiscal 2023, ZM shared its plans to introduce email and calendar services and a virtual agent chatbot for handling customer service inquiries.
On February 7, ZM announced that it would be laying off 1,300 employees, representing 15% of its workforce, to restructure and optimize its operations to support enterprise customers better and drive additional productivity. Chief Executive Eric Yuan said he was also reducing his salary and forgoing his bonus.
However, this belt-tightening hasn’t prevented the company from splurging to attract and retain the right kind of talent. ZM’s stock-based compensation expense soared to $1.3 billion in fiscal 2023, nearly triple the previous year's level.
Bottom Line
ZM’s business performance in the foreseeable future might struggle to return to the pandemic level. However, robust fundamentals and future-focused management could help the company, which helped the world stay connected during the pandemic, chart a steady course.
How Does Zoom Video Communications, Inc. (ZM) Stack up Against Its Peers?
While ZM has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its A-rated (Strong Buy) peers from the Technology - Services industry: Teradata Corporation (TDC), Box, Inc. (BOX), and Celestica Inc. (CLS).
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ZM shares were trading at $71.60 per share on Wednesday afternoon, down $0.25 (-0.35%). Year-to-date, ZM has gained 5.70%, versus a 5.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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