Zoom Video Communications (NASDAQ:ZM) has been one of the biggest winners of the pandemic, as its videoconferencing product became an essential utility during the crisis. But after its stock price surged during 2020, the stock has fallen back down to earth, down nearly 70% from its all-time high, which came shortly before effective COVID-19 vaccines were announced.
After that price pullback, it’s an open question on whether the stock can rebound from a rough 2021 or if it continues to lag the market as investors seem to be moving on. Keep reading to see what one Zoom bull and a Zoom bear think about the stock right now.
Bullish take: Vast potential beyond the pandemic
Jeff Santoro: The stock market often moves on news, as Zoom has proved, with its price rising and falling along with every piece of pandemic-related reporting. However, smart investors who look beyond the headline numbers will see a company with eye-popping growth and plenty of irons in the fire to move beyond its core video conferencing business.
It’s easy for investors to be distracted by the top-line numbers that show revenue growth slowing over the past few quarters. But trying to compare Zoom’s financial performance to the quarters where demand was at its peak because of the pandemic isn’t really helpful. Instead, when using a two-year comparison, we see that Zoom’s revenue growth was 531%, its net income grew 15,322%, and free cash flow increased 585%. Zoom also grew its number of customers with 10 or more employees by 591% and its number of customers contributing more than $100,000 in revenue by 359%. Looking at those performance metrics alone, it would be hard to make anything but a bull case for Zoom.
It’s also important to understand Zoom’s investments in future growth opportunities. Not content to rest on its laurels, Zoom is using the cash generated by the core video conferencing business to invest in other areas it sees as important to its future success. Zoom Phone, Zoom Meetings, Zoom Video Webinars, and Zoom for Home are just some of the products that are expanding Zoom’s reach. The most promising so far is Zoom phone, which saw triple-digit percentage revenue growth in the most recently reported quarter. Zoom is the perfect example of how the headline numbers that get reported each quarter can affect a stock’s performance in a way that may not necessarily reflect the performance of the business. But there’s plenty of growth ahead for Zoom, and if nothing else, the pullback in its price presents an attractive entry point for investors.
Bearish take: Years of growth have been pulled forward
Jeremy Bowman: There are a lot of reasons to like Zoom. The company has executed effectively during a challenging time. Its CEO has a compelling origin story and is a top-ranked leader on Glassdoor, and the company is highly profitable. But the stock’s fade over the past year, alongside other popular pandemic picks such as Peloton Interactive and Teladoc, seems to reflect a reality that has slowly dawned on investors: These companies, in particular Zoom, have pulled forward years of growth.
Before the pandemic, Zoom was a fast-growing company but still a niche product. Today, Zoom has become mainstream, a part of the daily lives of millions, and a verb — things that would not have been possible, or at least not for several years, without the shift brought about the pandemic. In other words, it’s going to be difficult for the company to grow at a rapid rate as it’s already penetrated much of its available market. For example, Zoom already has more than 500,000 customers with more than 10 employees. By comparison, there only about 1.5 million businesses in the U.S. with 10 employees, and many of them, like restaurants or cleaning services, will never need video conferencing software.
Wall Street seems to be recognizing this, especially after Zoom said that its revenue growth would slow to the high teens in the current quarter. The average analyst is calling for just 16% revenue growth next year and sees earnings per share falling as the company begins another investment cycle. The stock may look cheap at a price-to-earnings ratio near 40 based on this year’s expected earnings, but that reflects a much more normalized growth trajectory over the next few years, which makes sense after last year’s boom.
Expect Zoom stock to continue to be sensitive to developments with the coronavirus over the coming months, especially with fears of omicron creeping into the market. Given the relationship between the stock and news about the pandemic, it could still be several more quarters before the stock is judged purely on its business prospects and we see results that are unaffected by COVID-19.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.