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Zoom Is Still an Exciting Growth Stock

GuruFocus.com
·3 min read

- By Nicholas Kitonyi

Shares of U.S. telecommunications company Zoom Video Communications Inc. (NASDAQ:ZM) have pulled back more than 40% since Oct. 19. This put a dent in the company's impressive run in 2020, which saw it grow its market value by more than 700% before the pullback.

Despite the year-end decline, Zoom still completed 2020 with a net gain of more than 390%. The company benefitted significantly from the shift in working and schooling practices necessitated by the Covid-19 pandemic. The work-from-home and school-from-home trend became more popular in 2020, creating an exciting future for the video conferencing company according to Bill Gates (Trades, Portfolio).


Gates said in November that companies will cut business travel by half within the next few years in favor of virtual communication via video streaming platforms like Zoom. He also said that 30% of the American workforce will work from home as companies continue to embrace virtual offices and flexible working environments.

Therefore, even as shares of Zoom trade at a notably high price-earnings ratio of about 234, there could be still some room left to run going into 2021. In fact, if Gates' assessment should come to pass, then it would be ideal to say that Zoom is currently undervalued.

The company has already established itself as one of the preferred options for virtual business communication, putting it in a good position to capitalize on opportunities as they arise.

In its fiscal third-quarter 2021 results announced at the end of November, Zoom posted a top line of $777.2 million, which is higher than the total revenue reported for the entire fiscal year 2020. Net income for the quarter soared to $198.6 million, compared to $25.3 million reported last year.

Zoom is now one of the fastest-growing technology stocks in the market, but some might be expecting it to slow down in 2021. The Covid-19 vaccines have restored optimism in the market, with many expecting things to go back to normal within the next few quarters. However, the slowdown in vaccine rollout and inoculations could put those prospects to a halt. The U.S. planned to vaccinate 20 million people with the Covid-19 vaccine by the end of December, but has only managed to ship 11 million vaccines and vaccinated 2.1 million people.

On the other hand, the U.K. has started vaccinations, but the government has already called for partial lockdowns in areas hit hard by the second wave of the pandemic. As such, it could take some time before everything goes back to normal, which means that the work-from-home and school-from-home culture may be far from over.

Valuation

When we factor in expected earnings growth for the next five years, shares of Zoom trade an exciting PEG ratio of 1.64. In comparison, fellow U.S. telecommunications giant and the parent company of BlueJeans, Verizon Communications Inc. (NYSE:VZ), trades at a PEG ratio of 3.99. On the other hand, WebEx's parent Cisco Systems Inc. (NASDAQ:CSCO) trades at a PEG ratio of 2.95, while Skype owner Microsoft Corp.'s (NASDAQ:MSFT) equivalent is 2.57.

Therefore, it looks like Zoom's growth story could be about to get more exciting, even when some investors think it is over. The company's long-term future appears to be good and Gates certainly thinks so too.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.