Wait for the Next Dip to Buy Zoom Video Stock

There's still a lot to like about Zoom Video despite its massive run in early 2020

For many investors, Zoom Video Communications (NASDAQ:ZM) may very well be the one that got away. ZM stock was the equity that investors tried to buy on a slightly deeper dip or were too scared to pull the trigger on when the market began to roll over.

Wait for the Next Dip to Buy ZM Stock
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And amid all the selling pressure, ZM stock has been astoundingly strong.

Shares are up 115% for the year so far. Bulls continue to flock to the few stocks that are working right now, the ones showing relative strength in the face of panic. Zoom Video is one of those names, but that doesn’t mean it’s a buy right now.

The Coronavirus and ZM Stock

In the same way that the novel coronavirus has caused a spike in several low-priced biotech stocks, the virus has caused a spike in ZM stock. In these types of scenarios, these obscure biotech stocks tend to see dramatic losses once the virus subsides. While the catalyst for outperforming, obscure biotech stocks and Zoom Video are the same, the outcome won’t be.

We’re in unprecedented times, dealing with a scenario that changes by the hour. We have social distancing in place across the world, with many states under lockdown.

That has accelerated several key trends, like streaming video, telehealth and work-from-home solutions. That’s given a lift to Microsoft (NASDAQ:MSFT) for its cloud and Teams businesses, as well as Slack (NYSE:WORK).

It’s clearly causing a spike in use for Zoom Video too, with JPMorgan analysts saying the company is seeing a near-400% spike in daily average users (DAUs.)

Once the virus begins to subside and employees begin going back into the office, it’s quite possible ZM stock will take a hit.

However, there’s a silver lining: Video conferencing was a growing trend before the outbreak of Covid-19. With many now being forced into the situation, the virus likely accelerated that trend as more and more users get a taste of it.

Evaluating Zoom Video

All that said, ZM stock has gone bonkers. Investors looking to buy now aren’t grabbing the stock on a discount and getting ahead of the market — the stock has more than doubled already!

Current estimates call for $927 million in sales this year. That may very well prove conservative at this point, so let’s be generous and round it up to $1 billion. That still leaves Zoom stock trading at more than 44 times this year’s revenue estimates.

I am all for growth stocks, like Luckin Coffee (NASDAQ:LK) and Shopify (NYSE:SHOP). But this valuation isn’t cheap. Revenue estimates based on two fiscal years ahead (for fiscal 2023) call for $1.8 billion in sales. Now take this estimate with a grain of salt, because even nailing fiscal 2021’s revenue will be tough.

But even still, let’s be generous and round up to $2 billion in sales. That leaves ZM stock still trading at more than 22 times fiscal 2023 revenue. In fact, the highest estimate on Wall Street for fiscal 2023 is $2.1 billion, while the highest for this year is $1.03 billion.

Then There Are the Positives

The valuation is reason for pause, but there are many positives to this story too. First, growth is immense and while Zoom came public less than a year ago, management has crushed expectations. The company has beat on earnings and revenue estimates in every quarter of its public life.

Aside from impressive revenue growth, Zoom has strong margins too. Trailing gross margins of 81% are impressive, although operating margins could improve from just 2%. That last number is deceiving, because it makes it look like Zoom can barely turn a profit. What it should emphasize to investors is that the company can turn a profit. That’s despite being a relatively recent IPO and despite fueling immense revenue growth right now.

Zoom Video was profitable in fiscal 2020 and 2019, with net income growing 237% to $25.3 million in that time. Further, Zoom stock sports positive free cash flow in each of the past four fiscal years. In fact, the company generated more than $100 million in free cash flow in its most recent fiscal year.

Finally, Zoom has no long-term debt, $855 million in total cash, and currents assets of $1.1 billion against just $333.8 million in current liabilities.

In short, this company is a money-making machine and Covid-19 is only going to accelerate that trend. Its balance sheet is solid and revenue growth is strong, although the valuation is high.

Overall, ZM stock is a buy-on-the-dip candidate.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/wait-for-dips-buy-zoom-zm-stock-coronavirus/.

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