I think I’d struggle to find anyone who hasn’t been on a Zoom Video Communications (NASDAQ:ZM) call over the past year. It’s become part of our lockdown lives, as one of the main ways to work and socialise. Zoom shares have obviously benefited from this surge in demand from consumers over the past 12 months.
With some companies bringing in permanent remote working, Zoom could be here to stay for many of us. If so, it might not be too late to benefit from further potential gains in Zoom shares.
Already Zooming higher
Although I can’t believe I’m saying this, I need to make sure I’m talking about the right Zoom company. As well as the Zoom I’m referring to, there’s also a company called Zoom Technologies. Incredibly, this company saw a huge 10x share price spike last year as investors confused it with the other Zoom! This move obviously retraced back when people realised, but it does show the importance of doing research.
Now that we’re looking at the correct company, how much of a move higher have Zoom shares already seen? Well over a one-year period, they’re up 230%. That’s a very strong performance. If we pull this back a little further to when Covid-19 was just starting to generate some noise (around mid-December 2019), they’ve gained even more. Over this timeframe, Zoom shares have rallied around 430%.
Not all of this move was purely speculative buying due to the pandemic. Zoom released full-year earnings in early March, showing that it had performed well during this period. Revenue was up 88% versus 2019, with 81,900 business customers. The growth in business usage was 61% from 2019.
Higher revenue also provided a huge boost for cash flow. Free cash flow stood at $113.8m at the end of the year, up almost 5x on the figure from the previous year. So it’s clear that the move higher in Zoom shares was well founded.
What’s the outlook for Zoom shares?
The big question in my mind is whether Zoom is a flash-in-the-pan. The pandemic will end eventually. Will people drop (or at least reduce) Zoom usage as we get back to normal? Or will our lives be in a new normal, where video conferencing is still very much needed?
If the usage of Zoom collectively drops, I struggle to see Zoom shares remaining at the current levels. It has a high P/E ratio of 142, and a market valuation of $100bn. Net income for the year was $21.4m, so there’s a huge premium being placed on the stock right now. I think this is assuming Zoom will continue to grow, which I think is a risky assumption.
I also believe that even if we do keep video conferencing, competition for Zoom will be intense. Microsoft Teams and Google Meet (from Alphabet) are just two examples of larger tech businesses that have the scale and ability to eat into its market share.
From my angle, I struggle to see how buying Zoom shares right now would be justified. I think the potential upside is limited, whereas the downside could be significant. For that reason, I think I’ve missed the boat, and so would look at other ideas for stocks to buy.
