During the pandemic's early stages, Zoom Video Communications (NASDAQ: ZM) was one of the market's most popular businesses. The term "zoom" became widespread, and the firm experienced a massive boost in development throughout 2020, pushing the share price to around $600 per share.
The stock's price has now swung in the other direction. Investors appear to be avoiding Zoom stock, and shares are down more than 70% from its October 2020 high. Is Zoom doomed? Or can this roller coaster climb uphill again? Here is what you need to know.
Zoom's High Stock Price Was Unsustainable
In 2020, Zoom attracted both users and investors. People "Zoomed" with friends and family, students Zoomed for school, and businesses Zoomed with clients as the lockdown period began. The world clearly took on a more digital complexion. For Zoom, this meant that revenue increased 326% to $2.65 billion in fiscal 2021 (which hues close to the 2020 calendar year).
Despite this rapid revenue development, the stock price outpaced it. Zoom's price-to-sales ratio rose to 120, making it one of the most expensive stocks on the market at the time.
Investors' interest in Zoom began to wane as pandemic lockdowns decreased and the company's short-term growth faded. It's only natural that, following a decline in interest after the outbreak, investors would begin to cool on the stock. The stock price has taken a hit; perhaps it was exacerbated by a larger market sell-off among growth in 2021.
The Fundamentals of Zoom are Still Intact.
Zoom's huge market share, however, can't hide the fact that it just hasn't been able to maintain its triple-digit growth rate. Zoom stock brought in $1.05 billion in revenue during the third quarter of fiscal 2022 (ending Oct. 31, 2021), a 35% year-over-year increase. Zoom's revenue guidance of $4 billion for the year ending in 2022 indicates a 51 percent increase over that of the previous year. That is, Zoom stock improved by 51% in addition to the insane 2020 year when business exploded.
Zoom's net dollar growth rate in the third quarter was above 130 percent for the 14th consecutive quarter, indicating that existing clients are spending more after they start using its solutions. Customers are flocking to Zoom's unified communications software, Zoom Phone, which is the firm's new integrated communication solution. According to management, triple-digit percentage revenue growth year over year was attributed to Zoom Phone.
Zoom is a growing company that is still in its early stages but, despite this, Zoom has strong financials. For the full year 2022, management expects non-GAAP earnings per share (EPS) of $4.85, a gain of almost 300 percent over the prior year's figure. Zoom's profitability is increasing, as revenue outpaces the firm's expenses.
From Sky-High Expensive to Bargain-Basement
The stock market is prone to irrationality, and traders are frequently prone to overreact. Zoom's stock was undoubtedly priced far too high at its peak, but the momentum has swung so drastically in the other direction that it may be considered a bargain today.
Despite the fact that the firm's operations have expanded, its stock price has fallen to pre-COVID valuation levels. Despite increasing EPS at a triple-digit percentage rate, its price-to-earnings ratio of 34 is smaller than that of a consumer goods company like Nike (NYSE: NKE).
Meanwhile, if you calculate the stock's price-to-sales ratio by considering its revenue, it's a fraction of a company like Cloudflare's P/S of 38 while having comparable revenue growth. It's becoming more difficult to overlook Zoom based on the current valuation and impressive numbers it has achieved.
A Risk To Watch
Competition with Microsoft (NASDAQ: MSFT) is one of the top concerns for investors. With a larger presence and deeper pockets, Microsoft is a more formidable opponent than Zoom. Of course, Zoom competes against Microsoft Teams, which is an important element in Microsoft's corporate market dominance.
Investors will want to pay attention to Zoom's revenue growth and management's comments on customer account development to make sure the company is competing well. There's room for more than one winner in such a big market, but if Zoom's revenue begins deteriorating at a rate that prevents it from growing, investors may change their minds about the firm.