Is Zoom Stock a Buy Right Now?

In the last year, Zoom Video (NASDAQ: ZM) stock has taken investors on a wild ride. As the pandemic decimated the global economy, several governments announced countrywide lockdowns. Further, as international borders were shut and air travel came to a standstill the work-from-home trend accelerated at a rapid pace.

This bought into focus collaboration companies including Zoom Video that saw a massive increase in its stock price driven by an exponential rise in demand.

Zoom stock soared from $107 per share last February to $588 in October. Its now trading at $365 which is almost 40% below record highs. Despite the recent pullback, Zoom stock is up 240% in the last year.

 

Zoom’s revenue growth accelerated in fiscal 2021

Zoom Video reported an 88% growth in its top-line in fiscal 2020 (year ended in January). In the first three quarters of fiscal 2021, its revenue grew by 169%, 355% and 367%. The company claimed its segment subscribers with over 10 employees were up 354%, 458% and 485% in the same period.

Now, the company will look to expand its product offerings in order to gain subscribers and increase the customer retention rate. After gaining solid traction in the remote work and virtual classroom verticals, Zoom is now targeting the high-growth telehealth services vertical.

According to industry experts, Zoom’s user-friendly interface will make it easier for the company to enter the virtual health care space and increase adoption among private and public clinics.

 

Zoom sales will decelerate in fiscal 2022

In the last three quarters, Zoom Video’s sales were up 307% to $1.77 billion while its net income rose by 11 times to $630.3 million, indicating a healthy margin of 35.6%. In fiscal 2021, the company forecast sales to rise by 314% while adjusted earnings might rise between 726% and 731%.

In fiscal 2022, Wall Street expects Zoom to increase sales by 38% to $3.56 billion while earnings growth is estimated at just 3%. This means Zoom stock is trading at a forward price to 2022 sales multiple of 29.8x while its price to earnings multiple stands at 122x.

The company recently raised $2 billion via an equity offering which has strengthened its cash balance that can be used to expand its product portfolio as well as for acquisitions.

 

The verdict

Zoom stock might look overvalued right now given its decelerating revenue and earnings growth. But this trend was expected given the breathtaking growth witnessed in the last four quarters. There is a good chance that the work-from-home trend is here to stay making the company an ideal buy even in a post pandemic world.

Zoom faces competition from heavyweights such as Cisco (NASDAQ: CSCO) and Microsoft (NASDAQ: MSFT). But it is also one of the market leaders in the enterprise collaboration segment. The pullback provides investors an opportunity to buy a high-quality stock at a lower valuation.

Analysts tracking Zoom have a 12-month average target price of $466 which is 28% above its current trading price.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.