Zoom Video Communications (NASDAQ:ZM) is a great stock and a fine company. But today is not the day to buy it.
Before it announced fiscal 2020 earnings on March 6, Zoom had doubled since its IPO last April.
The numbers weren’t shabby:
- Quarterly revenue up 78% year over year
- Full year revenue up 88%
- Fiscal year income under Generally Accepted Accounting Principles (GAAP) up 106%
- Operating cash flow up 196% year-over-year
What has the stock done since then? Basically, nothing. It opened March 9 at $105 per share, down 8% from its March 6 close.
There are good reasons for that.
Turn, Turn, Turn
We should have a young David Crosby, still going strong at age 78, sing the harmony for us. Or if you prefer, open your Bibles to Ecclesiastes 3. “To every thing there is a season, and a time to every purpose under the heaven.” (A lot of investors are going to be on their knees this week.)
Zoom is a fast-growing company, but it’s still a small one. In a go-go market, where everyone is looking for growth, you grab that rocket ship and hang on. When everyone around you is panicking, however, you don’t pay 19 times revenue for anything.
Zoom is a hot stock right now because it offers free videoconferencing. Everyone is hiding at home, those who can are trying to work, and videoconferencing is a hot niche.
But there are going to be huge bargains in good companies once the machines are finished. I’m already seeing AT&T (NYSE:T) yielding nearly 6%, Verizon Communications (NYSE:VZ) yielding 4.5% and Cisco Systems (NASDAQ:CSCO) yielding nearly 4%. If you want to make money from people using their internet for work, you can do it in this market.
The reason is deflation.
I wrote about this last year. Technology creates deflation. If machines can do what people used to do, that’s deflationary. One impact is that the people go away.
Then add commodity deflation. Oil prices started March 9 were 23% below where they were a day before. You can hedge oil at $40 per barrel all the way through September 2021. Jet fuel is costing $1.60 per gallon out to 2023. There’s a contract for January 2024 gasoline at $1.24 per gallon. Once planes and trucks get back on the road, they’re going to be making money hand-over-fist.
It’s true that, as Zoom CEO Eric Yuan says, the coronavirus from China is going to “change the landscape” of work. Once companies see the savings from having staff work at home, many won’t be coming back.
But if you’re not actually writing software, the situation is more dire. Inflation means you pay more for goods at the supermarket. Deflation means you may not have a job to return to. This is what happened in the Great Depression. Nobody believes it can happen again. Inconceivable doesn’t mean what they think it means.
To everything there is a season. Technology is the reason. The panic starts today, but the reality is going to be with us a while.
The Bottom Line on ZM Stock
Once investors adjust to the new normal, and start looking for investments, Zoom Video may find its footing.
If it can double revenue in fiscal 2021, that may bring it close to the current price, because it would only be selling for 9 times revenue, not 18.
But it’s going to take time for things to adjust. In the near term, ZM stock will remain volatile. It could easily go below $100. Don’t even think about it until it does.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in CSCO.