Why Is Zoom’s Stock Dropping?

Why Zoom Is The Only Tech Stock I’m Buying Now

Zoom Video stock is down close to 50% from its record highs allowing long-term investors to place their bets on a quality growth company

After a stupendous run in the first half of 2020, shares of video-collaboration company Zoom Video Communications (NASDAQ: ZM) have cooled off significantly in the last year. Right now, Zoom stock is down 50% from all-time highs but it has also returned 360% to investors in less than three years, since going public in 2019. Let’s see why Zoom is the tech stock I’m buying right now.  

A look at Zoom’s financials

Valued at a market cap of $83.6 billion, Zoom provides a video-first communications platform across multiple devices. The COVID-19 pandemic acted as a massive tailwind for collaboration companies such as Zoom, allowing it to onboard customers and expand top-line at a stellar pace.

As organizations around the world adopted a remote-first business model amid lockdowns, Zoom saw its revenue rise from $622.65 million in fiscal 2020 to $2.65 billion in fiscal 2021 that ended in January.

In the fiscal second quarter of 2022, Zoom sales rose by 54% year over year to $1.02 billion. The number of customers contributing over $100,000 in the trailing 12-month period more than doubled while the company ended the quarter with an adjusted operating margin of 41.6%.

What I like about Zoom

Zoom continues to expand its customer base which is a key driver of revenue growth. The number of customers that contribute over $100,000 to Zoom’s revenue stood at 2,278 up from less than 1,000 in the year-ago period. 

It has onboarded more than 500,000 customers that have over 10 employees which is an increase of 36% year over year. Further, in the last 12-months  Zoom’s net dollar expansion rate in customers with more than 10 employees surpassed 130% for the 13th consecutive quarter. It suggests that existing customers are spending more on the Zoom platform.

Risks to Zoom’s share price

Between fiscal 2018 and fiscal 2021, Zoom’s revenue has grown at an annual rate of 160%. However, according to Wall Street’s estimates, the collaboration giant is expected to increase sales by 51.5% to $4.02 billion in fiscal 2022 and by 17.6% to $4.72 billion in fiscal 2023. Zoom sales were up 194% in Q1 and 54% in Q2. Now, the company’s management expects Q3 sales to rise by 31%.

It also faces competition from technology titans such as Microsoft and Cisco that have significant resources to expand their product portfolio and gain market share via acquisitions.

Zoom’s decelerating revenue growth, as well as low barriers to entry, exacerbate the risks for ZM stock that continues to trade at a premium. Despite losing 50% in market value in the last year, Zoom is valued at a forward price to sales multiple 20.9x and a price to earnings multiple of 58.3x which is extremely steep.

Zoom’s growth potential

The shift towards remote work is a long-term trend, making Zoom a top bet right now. It has successfully focused on product expansion allowing it to capture market share and keep widening the customer base.

In fact, the recent sell-off provides investors an opportunity to buy a quality growth stock at a lower multiple.

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