Few brand names ever manage to become a verb, but Zoom Video Communications, Inc. (NASDAQ:ZM) accomplished that impressive feat within the first decade of its existence. Whereas prior to the COVID-19 pandemic people would “Skype,” in 2020 they started to “Zoom.” Zoom’s user numbers, revenues and profits skyrocketed during the social distancing era, outdone only by its share price. In many ways, Zoom was the quintessential COVID bubble stock; it rose the highest and crashed the hardest, going from <$100 to the $550s to back under $100 all in the span of 2 years. Today, Zoom trades at an all-time low, discounted below its pre-pandemic price.
Of course, the fact that a stock is down 90% from its all-time high is not in itself a reason to buy. In fact, every stock that ever crashed to zero underwent a 90% decline along the way. That said, Zoom is at little risk of meeting such a fate. While the company’s growth has slowed significantly, its financial position and performance remain strong. With no debt, a $7B+ net cash position, and hefty profits and cash flows, it would take a hitherto-unseen act of God to send Zoom to zero. With the stock trading at EV/E and EV/FCF ratios of around 6, it’s hard to see how the price could realistically go much lower.
About Zoom
Zoom made its name as a video communications company, posting rapid user growth following the launch of its namesake videoconferencing platform in 2013. The company went public in 2019 and achieved profitability the same year. The timing of its IPO turned out to be quite opportune for early investors, as the COVID-19 pandemic resulted in mainstream adoption of its videoconferencing product and sparked a wild spike in the company’s share price. Since its October 2020 peak, the stock has shed 90% of its market value.
As sales growth weakened and the stock price declined post-pandemic, Zoom’s management team realized that the company would need new growth drivers to keep its operational momentum moving in the right direction. Accordingly, Zoom has sought to rebrand itself as a full-suite facilitator of open collaboration between employees and businesses. The company’s “Zoom Workplace” concept provides software solutions for “meetings, team chat, phone, scheduler, whiteboard, spaces, Workvivo, and more.”
In recent years, Zoom has also placed an emphasis on product solutions for its clients’ sales, marketing, and customer service departments. These efforts have included the development of Zoom Contact Center, a newer and higher-growth segment of the business. While the Contact Center unit remains a tiny portion of the overall business, its triple-digit growth rate deems it a highly notable segment with the potential to drive future growth for the company.
The Growth Story
Zoom’s revenues grew exponentially prior to the pandemic, expanding by 10x from $60.8M in FY2017 (ended January 2017) to $622.7M in FY2020 (calendar year 2019). Sales more than quadrupled to $2.65B in FY2021 and further advanced to $4.10B in FY2022 – a 67x increase in 5 years. As stay-at-home orders ended and employees returned to their offices, however, Zoom’s top-line growth slowed to a trickle. Revenue grew by 7% in FY2023 and just 3% in FY2024, giving rise to warranted fears that Zoom’s growth era could be coming to an end.
The company’s profit trajectory has followed a similar but more volatile path over the same period. Net income exploded from $25M in FY2020 to $672M in FY2021 and $1.38B in FY2022 before cratering to $104M in FY2023. However, profits returned to the growth track in calendar year 2023 at $638M. For the TTM period, the company’s GAAP net income sits at $838M. Accordingly, while profits remain significantly below the company’s peak levels, they are also growing quite fast in the short term.
If analyst estimates are to be believed, net earnings are likely to settle around current levels moving forward. Revenue is expected to grow by low single digits for the foreseeable future. Although I have little confidence in analysts’ ability to predict the future, I also have little reason to doubt the rough accuracy of these estimates. While Zoom’s high-growth days appear to be behind it, it seems probable that the company can continue to increase its sales on the back of secular long-term growth in video communication and workspace collaboration software. In the medium term, slow but steady growth seems to be the most likely outcome.
Price Multiples
With a market cap of $17.5B, ZM is quite cheap relative to its financial results. The stock trades at a trailing GAAP P/E ratio of 20, non-GAAP P/E of 10.5, and P/FCF of 10. While Zoom’s P/S ratio is 3.84, this elevated figure is justified by the company’s healthy gross margin of 76%. With an FCF yield of 10%, Zoom is poised to deliver strong returns in any scenario other than sustained operational contraction.
Net Cash Position
Zoom’s valuation looks all the more untenable considering the company’s fortress balance sheet, substantial book value, and formidable cash position. With zero debt, the company’s $10.3B of total assets (including $7.4B of cash and short-term investments) lap its $2.0B of total liabilities. Zoom’s tangible book value is $7.9B, approaching half of its market cap. The company’s net cash position is an astonishing $7.3B, equating to ~42% of its market value. Despite the fact that profits have dipped from their pandemic highs, the company’s book value, TBV, and net cash position are each growing by hundreds of millions of dollars per year.
Zoom’s balance sheet not only ensures its ability to make the investments necessary to fuel its future success, but also represents substantial tangible value that has already accrued to the benefit of shareholders. Deducting the company’s net cash position out of its market cap yields an enterprise value of just $10.2B. On this basis, the company features a trailing (non-GAAP) EV/E ratio and EV/FCF ratio of just 6.1 each. If Zoom simply maintains its current rate of profitability and cash generation, it will close the gap between its market cap and net cash position in barely half a decade.
Contact Center Business
In early 2022, Zoom expanded into the cloud contact center market with the launch of Zoom Contact Center. This product caters to customer service departments, serving as “a central hub for inbound and outbound customer communications.” Unlike legacy phone systems, cloud platforms allow for customer care teams to communicate and keep records on a single platform, accessible from any device or location. Considering Zoom’s background in internet-based video communication software, its expansion into contact center services was a natural pivot for the company.
Zoom Contact Center remains a nascent division of the company, but its breakneck growth has attracted increased investor attention in recent quarters. In Q1 FY2025, the division recorded 246% YoY growth of customers with at least $100,000 of annual recurring revenue (ARR). Zoom Founder & CEO Eric Yuan stated on the company’s Q1 earnings call that the Contact Center product “is now ready for primetime,” indicating that the young division’s growth is just getting started. If Zoom Contact Center can maintain its snowballing growth into the future, it could become a key growth driver for the company in the years ahead.
Recurring Revenue Business Model
Zoom’s product offerings are subscription services, meaning that the company has a much stickier and more cost-efficient sales model than businesses that generate revenue from one-off product or service sales. Many SaaS companies trade at eye-watering multiples to earnings due to the objective superiority of the business model, yet Zoom benefits from no such premium. Zoom’s average monthly churn has been around 3% in recent quarters, an improvement from past years and an indication that an average subscriber addition results in approximately 3 years of value to the company.
Buyback Program
In 2024, it seems that all the low-P/E, cash-rich companies are buying back their own stock – and Zoom is no exception. In February, Zoom announced a $1.5B buyback program. As of April 30, the company had repurchased 2.4M shares under the authorization for the aggregate sum of $150M. At its current price, Zoom could repurchase ~8% of shares outstanding, with the remaining $1.35B of repurchase power. That said, it’s worth noting that the company has presumably already spent some of this figure at somewhat higher prices over the past 3 months.
Risks
Competition
Upon the acceleration of videoconferencing adoption in 2020, Zoom swiftly dethroned Skype as the go-to video communication platform. Today, Zoom faces much the same threat from other platforms, most notably Microsoft Teams and Webex. Teams has the critical advantage of being built into other Microsoft applications as the default web call option, and has leveraged this competitive edge to extraordinary success. That said, Zoom remains an industry kingpin, as demonstrated by the resilience of its subscriber numbers and financial results. While the risk of new competitors is real, it’s worth noting that powerful network effects exist to the benefit of industry incumbents. This network effect represents a significant obstacle to newer would-be competitors, particularly amid a drastic slowdown in the growth of video-calling product adoption. Teams and Webex aren’t going anywhere, and by all appearances, neither is Zoom.
Return to Work
The 2020s boom in demand for Zoom’s platform was largely driven by remote work during the pandemic. Although most employees long ago returned to in-person work, there is still a residual work-from-home effect present in the labor market. As of August 2023, the U.S. Bureau of Labor Statistics reported that 19.5% of employees still teleworked. In many cases, companies are still battling to force employees back into the office. Reporting suggests that remote workers are 35% more likely to be laid off and that return-to-office mandates are being deployed in lieu of layoffs in some cases. These developments threaten to chip away at demand for videoconferencing software, which is not needed for communication between employees working at the same location. That said, an Upwork study suggests that the proportion of remote workers in the U.S. will actually tick up to 22% by 2025.
Economic Uncertainty
Fears of an imminent U.S. recession are running rampant. The unemployment rate is rising, which could have a direct impact on Zoom’s business. Similarly, a decline in corporate and consumer spending amid a weaker macro environment would mean that Zoom and its rivals must compete over a smaller pie of available software dollars. While these risks are real, demand for teleconferencing solutions isn’t going away anytime soon. Short-term macroeconomic uncertainty should never dissuade long-term investors from buying consistently profitable companies at compelling valuations.
Conclusion
Zoom is no longer the high-flying growth juggernaut it was just a few years ago. Instead, it has morphed into something much more compelling – a bargain-priced value stock. The 90% drop in the company’s share price has left it trading at just over 2x net cash and 10.5x adjusted earnings, while its revenue growth humbly chugs along in low single digits. Zoom’s current performance is far from glamorous, but the price is unjustifiably depressed relative to its substantial cash flows, which come on top of its substantial existing cash pile.
Despite intense competition in its operating market, Zoom is doing just fine. The company’s strong brand recognition and high product adoption rate provide it with a sustained competitive advantage, which management is doing a solid job of capitalizing upon. Zoom does not need to command the market to be successful and deliver strong financial results; its current performance demonstrates that it can thrive as one of numerous players offering video communication and workplace collaboration software services.
The growth pace of Zoom’s industry has unquestionably slowed. Be that as it may, Zoom stands to continue benefiting from the long-term trend of an increasingly digital world. Even if its growth continues to crawl forward by low single digits, Zoom’s valuation is so low that the stock could still deliver strong returns in such an environment. In a more optimistic scenario where growth re-accelerates following the dissipation of near-term headwinds, Zoom’s share price could truly soar from here. Regardless, the company’s powerful profits and mountains of unencumbered cash combine to form a critical margin of safety for shareholders.
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