About Zoom Video Communications

I am a sucker for those funny placeholder backgrounds offered by Zoom. I mean, when I can make it appear as though I’m on a beach off the coast of Amalfi and seconds later am all of the sudden floating in outer space, I get the giggles.

Suffice it to say, Zoom has opened up too many possibilities for me and in some ways has made me revert back to my childish ways. 

However, during what has initially been the worst (and hopefully was) of the COVID-19 pandemic my primary use for Zoom was school and I felt extremely disconnected and unbearably detached from my friends, potential friends and feeling and truly living like a normal college student. 

Bad for me along with millions of other students and others across the globe but fantastic timing for Zoom. 

Founded in April 2011, Eric Yuan ultimately departed from his job at Cisco’s video communications platform, WebEx, which he was, interestingly, a part of the start-up’s initial team before it was eventually bought out by Cisco and ended up venturing out on his own. 

Oh, and then he founded Zoom, which I guess is sort of a big deal.

As a brief aside and fun fact about the early days of the company, Zoom’s first customer was none other than Stanford University.

Moving right along, for those who aren’t familiar with Zoom, it is essentially a video communications platform through which individuals can join, host or attend casual chat hangouts with friends or loved ones, class lectures as well as formal business meetings and pretty much everything in between. Obviously, during 2019 and 2020 this company’s services were experiencing some rather high demand.

As the global economy and society as a whole continues to emerge from what has hopefully been the worst of COVID-19, the million-dollar question has become whether or not Zoom’s stock is a good investment for the long-term, especially as the company’s share price has cratered back to normal, pre-COVID levels. 

And we mean cratered.

The company’s stock saw an all time high of $559 and is now trading below $100.

Full disclosure, our team at MacroHint is of the general opinion that Zoom will still be in high demand for years, decades and centuries to come given that people are naturally creatures of habit and that habits developed are hard to break. 

This being the case, in addition to potentially elevated switching costs deterring users from ceasing to use Zoom, it will likely be quite difficult for universities, businesses and other major clients of Zoom to cut ties and go back to fully in-person, as many either don’t want to go back in person due to personal health concerns or they’ve just simply developed a habit of doing meetings while in their pajamas.

Either way, let’s zoom right into Zoom.

Zoom’s stock financials

Currently trading at a share price of around $80, the company has a market capitalization of $24 billion, a price-to-earnings (P/E) ratio of 24.21 and like most tech-centric companies, does not distribute an annual dividend to its shareholders.

This initial preliminary information on Zoom’s stock indicates that the company’s current share price is slightly overvalued, since a P/E of 20 is generally accepted to imply that a company’s stock is trading at fair value or what it’s worth and anything higher alludes to the fact that it is overvalued.

Thankfully, Zoom’s stock isn’t drastically overvalued, at least, according to this ratio alone.

Onto Zoom’s balance sheet, Eric Yuan and company manage around $7.5 billion in total assets matched with approximately $1.7 billion in total liabilities.

This balance sheet is trim and ready for a recession.

While we’re definitely not hoping for anything worse than that (such as a depression), it’s definitely not a bad idea to be invested in companies that are seemingly prepared for the worst and yet still are able to perform well during both the worst and the best. 

Kudos to Zoom’s executive team.

As it relates to the company’s income statement, Zoom’s total revenue has performed exceptionally well over the past five years but that is to be fully expected as this company has had a lot to gain in a COVID-19 world. Nevertheless, Zoom’s total revenue in 2018 stood at $151 million, $331 million in 2019, $623 million in 2020, around $2.6 billion in 2021 and $4.1 billion in early 2022.

For any other company this would’ve been outlandishly impressive, however given the fact that schools, businesses and everyone within these organizations had to suddenly adapt and heavily rely upon Zoom (and a few of its older, more seasoned competitors, such as Skype, WebEx, FaceTime (Apple) and Microsoft Teams), it’s impressive but reasonably expected.

Zoom’s executive team has also done a great job at generating positive, upward trending cash flow over the last five years. For instance, the company’s net income in 2018 stood at -$4 million and was reported in 2022 as nearly $1.4 billion.

It’s usually hard (or at least uncommon) for rapidly growing emerging technology companies to have the ability to produce positive net income as relatively early as Zoom has, however the company has done it and we might add that it has done it in a strikingly strong fashion. 

Suffice it to say there are many, many strong signals that this company is well prepared for whatever is to come its way.

Zoom’s stock fundamentals

Given that this company has been able to take the world by storm through its various products and offerings, it also makes sense (but is still impeccable) that the company’s trailing twelve month (TTM) net profit margin has been able to assert a dominant position in relation to its peers. 

Specifically, Zoom’s TTM net profit margin currently stands at 23.06% in comparison to the industry’s average of 15.4%, as reported on TD Ameritrade’s website.

We initially assumed that the company’s TTM net profit margin was going to be at or slightly below that of the industry given the stiff competition, however it’s a welcome surprise to find that Zoom has out-profited some of the largest, most innovative technology companies of all time.

According to Zoom’s TTM core return metrics, the company trails the industry in terms of TTM returns on equity ever so slightly, while at the same time outperforming the industry when it comes to TTM returns on assets and investment, which we think are generally more important than returns on equity to begin with.

Investors should not sleep on this company and its stock.

Should you buy Zoom stock?

What started out as a “pandemic” stock has morphed and grown into a company that we think is the most serious player in the video communications sector. 

 While the COVID-19 pandemic has provided the company a massive, once in a lifetime growth and market penetration opportunity, Zoom has proportionately executed and delivered for its customers quite well and given its current financials and related metrics, we don’t see why this isn’t to continue in the next five, ten or twenty years.

Although the company’s stock is trading slightly above fair value, we see substantial growth in this company’s future and thus deem it appropriate to give Zoom a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.