Zoom Video Stock Will Be a Buy When It Settles Down

ZM has been one of 2020's best stocks, but at this price, investors can look elsewhere for now

Simply put, Zoom Video Communications (NASDAQ:ZM) has been one of the best stocks of 2020. In fact, ZM stock may be the best stock of the year, period.

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Among over 500 stocks with a market capitalization above $10 billion, not one has outperformed Zoom Video stock so far this year. ZM’s 103% return is nicely ahead of second-place Teladoc Health (NYSE:TDOC), one of my own long-term picks for upside.

Some smaller stocks have provided stronger year-to-date returns. But many of those stocks are biotechnology or pharmaceutical companies developing coronavirus treatments. And at least a few of those stocks are likely to crash when they fall short.

ZM stock, however, is not going to crash. The short-term tailwind from employees working at home will provide a long-term benefit as well. And Zoom Video unquestionably is a leader in its space.

The one concern right now is valuation. ZM stock is not cheap. And while that alone doesn’t sink the bull case, it does create one problem at the moment. I’m skeptical investors need to pay up a quality stock like ZM when they still can pick up other quality companies at a discount.

The Long-Term Case

Zoom Video is succeeding in a video conferencing space where many have failed.

Bear in mind that Microsoft (NASDAQ:MSFT) acquired Skype almost nine years ago. That giant never has been able to drive consistent growth in Skype for Business. Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google Hangouts appears to have relatively small share. Zoom Video seems to be competing well against Cisco (NASDAQ:CSCO) Webex.

And Zoom Video was performing well before the coronavirus pandemic arrived. In 2019, revenue grew a sparkling 88% year-over-year. Unlike a lot of high-multiple growth companies, Zoom is profitable as well. Adjusted operating margins in 2019 were over 14%.

Zoom Video was one of the best stories in the market coming into this year. Now it’s getting another tailwind.

Millions of white-collar workers now are working from home. Those workers and their companies are going to use Zoom’s video conferencing solution.

It’s not just a short-term tailwind. Zoom is going to get millions of users and convert many of those users to subscribers. The big boost to 2020 usage is going to lead to higher revenue in 2021 and beyond.

It’s even possible that the current crisis will change corporate behavior going forward. Employees working from home now may prefer to do so more often once normalcy returns. Such a shift would only add to Zoom Video’s already-impressive growth potential.

Can Investors Do Better?

What helps the case for ZM stock here is that the company isn’t just getting a short-term boost to usage. And so it doesn’t follow that the big gains seen this year have to reverse.

But those gains have come at a time when many other quality names have declined. And that does undercut the case for Zoom stock at these levels.

Take a look at Costco Wholesale (NASDAQ:COST). Costco, too, is getting a short-term boost to its results as consumers stock up. But, like Zoom Video, Costco gets a long-term benefit as well.

The benefit is much the same. Like Zoom Video, Costco is going to acquire new members that will stick around for the long haul. Membership fees actually drive basically all of the company’s profit.

That’s why I recommended COST stock earlier this month. Yet in this still-bearish market, COST stock has weakened modestly since then. While ZM stock has doubled, COST is down about 2.3% year-to-date.

Alternatives to ZM Stock

It’s not just Costco, either. There is no shortage of growth names that have plunged.

I’ve highlighted Splunk (NASDAQ:SPLK) and The Trade Desk (NASDAQ:TTD) in recent days. Investors looking beyond growth can choose long-term winners like Visa (NYSE:V) that remain well off their own highs.

I’ve argued for weeks that this crisis, as tragic as it is, will pass. And when it does, I expect the economy and the market to roar back. And so at this point investors should consider looking at plays on the recovery, not the crisis.

That’s already happening. When markets soared on Tuesday, ZM stock actually fell 15%. It’s recovered some of those losses, but lagged tech since.

Investors are starting to position themselves for what is coming, not what is happening. That’s the right strategy to take. But that may lead to more profit-taking in ZM stock and a lower price.

At that lower price, Zoom Video may again look like an attractive buy. But in the meantime, in a market still more than 20% off its highs, investors can, and probably should, look elsewhere.

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/zm-stock-buy-settles-down/.

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