Zoom Is a Value Growth Stock Worth Owning for the Long Term

Trying to catch falling stocks in this environment where Wall Street is extremely jittery is tricky business — even if the opportunity is from a quality company like Zoom (NASDAQ:ZM). ZM stock is fairly new, so investors won’t give it much benefit of doubt. It burst onto the scene with force, but they’ve forgotten that.

A woman sitting at a desk waves at a large number of people on the videoconferencing software Zoom (ZM).
Source: Girts Ragelis / Shutterstock.com

ZM stock skyrocketed early in 2020 because of the pandemic. When we could not leave our homes, we had to use its services for everything. That was the thesis then and it remains so now, only better. In 2020 it ran on hopes of bigger results, and the company has since proved the concept. This is a stock worth owning for the long term.

Naturally, user metrics for ZM stock exploded during lockdowns, and so did the stock. The rally to its all-time high of nearly $589 per share was completely bonkers. At the peak, I remember trying to keep traders out, citing its high price-to-sales (P/S) ratio. That was a sure sign of bloat suggesting investors had unrealistic expectations.

I was right, because the reality did not live up to that and investors are still punishing it. They are now making the opposite mistake they made in October of 2020. This is when it becomes interesting — while they are still panicking out of ZM, it is a bargain worth exploring.

The Outside Risk Factors of Zoom

There are two problems to consider before going all in. First, it is still a falling knife and dangerous to catch. The second problem is the overall correction of indices. The overshoot is creating opportunities, but I am concerned about the drag from the indices.

Now, the bears are in control for the first time in a while. The bulls have lost all tailwinds, including the Federal Reserve. Add to this current geopolitical tensions, and the concerns are valid.

My thesis is that this too shall pass, but in the short term I realize the looming headline risks. Therefore, I would not take positions without leaving room for error. I take my conviction level down a notch by design. Zoom stock does not trade in a vacuum, so it needs a solid market within which to rally.

Last night, the indices broke through key support levels and are hanging on by a thread. The S&P 500 came within .7% of its Feb. 24 low. If we lose that, we run the risk of losing another 11% from there.

ZM stock has support, but it is 720 days old, so it’s not very effective now. Luckily, the fundamentals are impeccable, and they do support the bullish thesis. I bet buying ZM stock with a 27x price-to-earnings (P/E) ratio and a P/S ratio of 9x is not an obvious mistake. At these levels, it is cheaper than Apple (NASDAQ:AAPL), and it grows much faster too.

The easiest mistakes to avoid are often from chasing runaway stocks. The current commodities rally is potentially a giant disappointment in the making. Buying Chevron (NYSE:CVX) at all-time highs is a risky chase when AAPL is seeking new lows.

The ZM Stock Thesis Is Viable

Zoom (ZM) Stock Chart Showing Pandemic Base Support Zone
Source: Charts by TradingView

The current ZM stock situation is the opposite of that. Therefore, I am comfortable allocating new risk into Zoom’s shares after they have already fallen about 82%. This makes the downside risk much smaller than the upside opportunity.

Those who believe in charts also may see patterns suggesting a rebound rally is brewing. At the first sign of an overall risk relief, I bet ZM can rally to $285 per share. There will be resistance near $250 along the way, but the potential is there. Starting a long position now gives investors ample opportunity to profit in the midterm. The idea is to own it for the long term, but with a short-term scalping opportunity.

When markets are this nervous and the CBOE Volatility Index (VIX) is at 35, we all should be traders. The pandemic pretty much killed the old buy-and-hold methods.

For example, consider what happened yesterday morning to the Bed Bath & Beyond (NASDAQ:BBBY) stock. It rallied 80% because the GameStop (NYSE:GME) chairman invested in it. Luckily, I was online with my trading group and suggested they buy puts in it at the open. Those who did made a killing in mere hours, safely shorting the spike. I don’t know what happened to logic, but it’s definitely not on Wall Street.

Regardless, I still enjoy doing some good old-fashioned homework and trusting financial statements. Unlike yesterday’s BBBY stock headline, ZM stock has supporting Securities and Exchange Commission (SEC) filings for proof of outstanding performance.

The Bottom Line on ZM Stock

I debated this topic yesterday with a friend, as he cited ZM’s problem with growth. The reality is that it still grew almost 60% last year. Moreover, that comp came on top of an astonishing pandemic year scorecard. I am confident most companies would love to have that problem of “only” 56% growth.

Management earned all the kudos it needs from me until they commit a mistake. So far, Zoom has shown no signs of growing pains like Peloton (NASDAQ:PTON) did, for example.

I had concerns about potential disappointments in 2021 versus 2020 when the pandemic began. But the company passed the test with flying colors. In the process, it managed to normalize its P/S ratio. Current buyers of ZM stock have realistic expectations, paying only 9 times actual sales.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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