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Zoom Video Communications Cl A(ZM-Q)

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Zoom In On This Deep-Value Technology Stock With Market-Beating Upside

Motley Fool - Thu Sep 7, 4:10AM CDT

It's hard to find bargains in the technology sector, but a former sensation Zoom Video Communications(NASDAQ: ZM) is worthy of consideration. Everyone Zoomed during the lockdowns caused by the COVID-19 pandemic, but that early success pulled forward a lot of potential users, and the company's growth has flatlined since. Share prices have collapsed as a result, with the stock down 87% from highs set in late 2020.

The market's expectations for Zoom couldn't be lower at the moment, and yet the potential for market-beating returns going forward only grows larger. That's not because the stock is cheap, but because Zoom's long-term prospects got much brighter than the market is pricing into the stock right now.

Here is what you need to know.

Zoom stock has really low expectations

The world seemingly jumped into digital communications during the pandemic's height, when lockdowns snuffed out face-to-face contact. Zoom, one of the leading video communications platforms, benefited from a tremendous growth spike. The company's sales have grown more than seven-fold since 2020, and most of that growth came between 2020 and 2022.

Chart showing Zoom's revenue rising, and revenue growth falling, since 2021.

ZM Revenue (Quarterly YoY Growth) data by YCharts

Sales growth has evaporated since then. However, Zoom hasn't given back any revenue, which supports the theory that its growth wasn't a fluke. The pandemic just pulled Zoom's growth forward. In other words, customers who may have wanted Zoom in the future got it sooner because of the pandemic.

Chart showing Zoom's PE ratio and EV to revenues falling since 2022.

ZM PE Ratio (Forward) data by YCharts. PE = price to earnings. EV = enterprise value.

Regardless, Wall Street hates it when growth slows. That sentiment has shown up in Zoom's stock price, which has plummeted nearly 90% from its peak. Today, the stock trades at its lowest valuations on record, from both an earnings and revenue standpoint.

Why Zoom's growth could pick up again

But Zoom has multiple catalysts to ignite growth as the company moves further out from the pandemic years. For starters, it's still adding customers. The company's fiscal year 2024 second-quarter earnings (for the period ending July 31, 2023) reported that enterprise customers grew 7% year over year to 218,100, and accounts spending at least $100,000 grew by 18% to 3,672.

The increase in big spenders signals Zoom's potential for upselling. Don't assume that Zoom's video product is the whole package. Zoom has an expanding platform that offers tools for how companies communicate internally and externally. For example, management noted in its recent earnings call that a Zoom customer, the largest senior housing operator in the United States, signed on for Zoom Video meetings during the pandemic. It began looking at Zoom's cloud-based phone product in 2021 and recently upgraded to Zoom One, which contains a full suite of digital communication tools.

Zoom may never again see the level of explosive growth it saw during the pandemic's height, but it seems the market has prematurely called for Zoom's demise. It's still growing its enterprise business, which could move the needle more meaningfully if upselling continues.

Rapid earnings growth on the way?

The company is very profitable already. It has turned nearly $0.27 of every revenue dollar into free cash flow over the past year. Additionally, Zoom has $6 billion in cash and zero debt. That's 28% of the stock's market cap!

Long-term investors will likely benefit from how Zoom deploys its war chest of cash over the coming years. That's plenty of money to fund an acquisition or product development. It could buy back more than a quarter of its existing shares.

Revenue growth will only add more cash to Zoom's pockets, which could explain why analysts are so optimistic. Long-term growth estimates call for nearly 38% annual earnings growth, and the stock trades at a forward price-to-earnings of just 15! That's an eye-popping cheap price-to-earnings-to-growth (PEG) ratio of just 0.46. Wall Street's current sweetheart stock, Nvidia, has a PEG ratio of 3.4 (lower is better).

Chart showing Zoom's debt flat, and its cash and short-term investments and EPS growth estimates up, in 2023.

ZM Cash and Short-Term Investments (Quarterly) data by YCharts

Assuming Zoom delivers on analyst estimates, the stock is arguably one of Wall Street's best deals. The business is still adding customers and upselling products, and the financials are a fortress-like safety net that should help investors sleep well at night.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Zoom Video Communications. The Motley Fool has a disclosure policy.

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