Here’s Why You Should Buy the Dips in Zoom Stock

If investors were pressed to name the go-to stock for the novel coronavirus, many would answer Zoom Video (NASDAQ:ZM). And rightfully so. Zoom stock barely flinched when volatility cranked up in February. And it outright soared in March while the rest of the market was getting crushed.

Zoom (ZM) logo on a building
Source: Michael Vi / Shutterstock.com

In fact, Zoom stock rallied almost 50% from the last trading day in January to the first trading day in March. In March, while the S&P 500 and Nasdaq Composite fell 12.5% and 10.1%, respectively, Zoom climbed another 39%. 

Overall, shares rallied 735% from the start of the year to the high in October. There’s no denying that Covid-19 was a massive catalyst for Zoom, but it has long-term growth drivers too.

So, with all of that in mind, let’s dive in.

COVID-19 Is a Catalyst, but Not the Only Thing

It would be foolish to say the coronavirus didn’t accelerate Zoom’s business. But here’s the thing: it would also be foolish to pretend that Zoom is only doing well because of the virus.

This isn’t a company that saw an opportunity to make a few bucks and completely pivoted its business model to take advantage of it. While a business like that would benefit in the short term — and trust me, they exist — they will be left out to dry when Covid-19 is no longer a catalyst.

We’re already starting to see this catalyst dwindle away, too.

Despite a record number of coronavirus cases and a spike in hospitalizations and deaths, the pandemic stocks are not reacting with any sort of vigor.

Down about 15% from its October high, bulls are beginning to ask questions. While Covid-19 may not be serving as the catalyst that it once did — after all, Zoom commands a market capitalization north of $136 billion now — doesn’t mean the story is over.

I say this because companies won’t go back to activities that take more time, cost more money and are less efficient. Think about it. It wasn’t long ago that to get a deal done or pitch a presentation, someone or a team had to board a plane, fly to a different office and get acquainted with the other team. Then they would make their pitch, go to the hotel and fly home the next day.

Now, replace all of that — the plane tickets, hotel stay, dinner tabs, etc. — with a Zoom conference. There will be some that go back, but not all. And that’s where Zoom will carve out its recurring business.

Business Is Booming

Current-year forecasts call for revenue growth of almost 290%. If it comes to fruition, it will mean that Zoom recorded fiscal 2021 (this year) revenue of $2.41 billion vs. just $622 million last year. In fiscal year 2022, consensus estimates call for revenue growth of 30.6% to $3.15 billion.

To go from $622 million to more than $3 billion in sales in two years is absolutely incredible. Obviously the growth rate should decelerate, but the fact that Zoom is forecast to have 30% growth — respectable in itself — after almost 300% growth is just…wow.

However, could it actually be conservative?

First, the company has reported earnings six times since going public. In that span, it’s beat on top- and bottom-line estimates each time. It’s also worth noting that it has reported a profit in each of the past six quarters and has been free cash flow positive.

So it’s not just the pandemic driving the company’s short-term gains. Zoom was a high-quality company focused on growth, profit and cash flow before the mother of all catalysts kicked in.

Back to the question of conservative outlooks. When Zoom reported its first-quarter results on June 2, the company’s guidance blew away the analysts. Management called for Q2 revenue of $495 to $500 million vs. consensus estimates of just $224.4 million. Furthermore, they expected earnings of 44 to 46 cents per share vs. expectations of just 11 cents per share.

Moreover, full-year guidance of $1.775 to $1.8 billion in revenue was almost double the consensus at $939.7 million. Of course, in hindsight that looks totally conservative vs. the current estimate which is now at $2.4 billion.

But friends, just look at this. Management expected revenue of $495 to $500 million in Q2, right? Instead, Zoom reported sales of $663.5 million on 355% year-over-year growth. I think it’s reasonable to believe that current growth estimates are conservative.

Bottom Line on Zoom Stock

Daily chart of Zoom stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Collectively, many investors’ biggest issue with Zoom stock is its valuation. With a $136 billion market cap, shares trade at about 103 times this year’s revenue estimates. That is rich and that’s putting it mildly. But the growth here is too much to ignore.

Consensus revenue expectations for two years out sit at $3.9 billion. The highest estimate for that year is $5.4 billion. I think that is possible given the growth here. That’s 22 times the current estimate, which isn’t bad even though it’s a long ways off.

Overall, Zoom reported earnings on Monday after the close. That said, let’s see how Wall Street reacts. Ultimately, a bit more pain on the downside — perhaps down to the $325 gap fill — would be such a great opportunity to get long. But there’s not telling whether we’ll ever get there with Zoom stock.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. 

Matthew McCall left Wall Street to actually help investors –by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.


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