Zoom Video Communications (NASDAQ:ZM) is one of the companies that have become paired with the pandemic. ZM stock went public in April 2019 at an opening price of $65, and in March 2020, it was shy of $100.
Then Zoom became a verb when lockdowns prompted businesses, people, and schools to rely on video calls to interact with one another. As the pandemic has now evolved to a different stage with people out in the world again, investors are debating as to what to expect from Zoom’s long-term prospects.
In 2020, the pandemic sent Zoom stock soaring around 490% between March and October. ZM stock hit an all-time high of $588.84 on Oct. 19, 2020. Investors cheered as sales more than quadrupled to $2.65 billion in 2020.
Although Zoom’s quarterly results continued to impress through much of this year as well, ZM stock has been consistently falling over the past year. Today, hovering at around $255, the stock has lost over 55% since its record high a year ago. It’s also down about 21% year to date.
Let’s now take a closer look at what investors could expect from ZM stock in the coming weeks. Long-term investors with a two- to three-year horizon could consider investing in Zoom, especially if the share price dips below $250. With a market capitalization of about $75.5 billion, we can expect the company to grow significantly more.
How ZM Stock’s Recent Earnings Came
As Covid-19 put Zoom in the spotlight, many investors began regarding Zoom as a pandemic stock. Such a view might imply the company will be less relevant once the pandemic is completely over. However, remote work is not likely to disappear. Many businesses, especially large enterprises, plan on using video apps even as the pandemic fades out.
According to second-quarter metrics for the fiscal year 2022, Zoom grew its quarterly revenue by 54% year over year to $1.02 billion. Non-GAAP net income surged 51% to $415 million, or $1.36 per diluted share. Zoom generated free cash flow of $455 million during the quarter. Cash and marketable securities ended the quarter at $5.1 billion.
On the results, CEP Eric S. Yuan cited, “In Q2, we achieved our first billion-dollar revenue quarter while delivering strong profitability and cash flow.”
Zoom’s base of customers that generated more than $100,000 in revenue grew 131% from a year ago. Meanwhile, Q3 revenue guidance came in at $1.02 billion, up 31% but flat on a sequential basis. Investors noted that the growth is slowing, mainly due to a decline in the number of small business and individual subscribers.
Over the course of the pandemic, Zoom has become one of the most popular video conferencing applications on the market. As of June 2021, Zoom Meetings has captured well over a 50% market share. Given Zoom’s broader user base compared to its peers, many businesses simply prefer to use the Zoom app.
Strong Tailwinds In an Evolving Market
Despite the recent decline in price, Zoom still remains a growth story. Market research shows a significant change in the workplace, a trend that is likely to benefit Zoom further. According to research group Gartner, “that 48% of employees will likely work remotely at least part of the time after Covid-19 versus 30% before the pandemic.”
In addition, Accenture also highlights, “63% of high-growth companies have already adopted a “productivity anywhere” workforce model.” Put another way, these firms are allowing or even encouraging employees to work both from home and at the office.
Meanwhile, Zoom keeps enhancing its platform. In July, the company announced two major app launches. Now users can embed third-party apps in meetings. Wall Street is noticing the potential of this unified communications platform as a service (UCaaS) offering.
Recent numbers from Brandessence Market Research suggest that the “Global UCaaS market size is valued around USD 16.46 Billion in 2020 and expected to reach USD 32.28 Billion by 2027 with the CAGR of 10.1% over the forecast period.”
Understandably, such growth implies a massive market opportunity for Zoom. The UCaaS space is already quite crowded, and includes some formidable names such as Amazon’s AWS (NASDAQ: AMZN), Twilio (NYSE:TWLO), 8×8 (NYSE:EGHT), Avaya (NYSE:AVYA) and Cisco (NASDAQ:CSCO). However, Zoom is likely to take a significant share of this pie.
The Bottom Line on ZM Stock
Zoom stock has been a great growth story in the past two years. Although shareholders shouldn’t expect triple-digit growth in the coming months, it does not mean giving up on ZM stock. Individuals and small businesses may cut down their reliance on video conferencing software, but the corporate world will likely keep relying on the app.
From a valuation perspective, ZM stock looks increasingly cheap as well. Despite plunging share price, revenue and profit have continued to grow, pushing the price-earnings and price-sales ratios to all-time lows. As a result, the stock now trades around 52x forward earnings and 22x trailing sales. Interested buy-and-hold investors could consider buying the dip in ZM shares.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.