It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are.
Proprietary Data Insights
Financial Pros Work-From-Home App Searches in the Last Month
This 2020 Darling Is Down but Not Out
Earnings become a popularity contest within our proprietary Trackstar database.
The more interesting the story, the more searches a company gets.
But we like a story with a little something more.
When searches for Zoom Video Communications (ZM) jumped from a daily average of 30 to nearly 200 in late November, we noticed.
Yet it wasn’t until one of our publishers printed an article about Cathie Wood that we got interested.
Wood looked like an investing genius to those unfamiliar, with her actively managed funds skyrocketing alongside tech companies…
Until they crashed and made her look crazy as she spouted off about deflation.
But not all her holdings are equal.
Among them, the write-up of Zoom looked appealing.
Shares climbed to nearly $600 apiece in 2020 but are now below $70.
As Trackstar shows, financial pros are taking a hard look at the stock, likely because ZM:
Zoom was a darling stock in 2020 but has quickly fallen from grace.
Yet unlike the Carvanas and Fastlys of the world, it’s profitable.
Is that enough?
Zoom Video Communications’ Business
If you haven’t been on a Zoom call, you’re one of the few.
Zoom provides a remote communication platform that combines videoconferencing, voice, audio, screen sharing, and chat functionalities. It’s available on desktops and mobile devices.
Zoom has 209.3K enterprise customers as of Q3 2023. Of those customers, 3,286 contribute more than $100,000 each in the trailing 12 months of revenue.
89 of the top 100 global universities use Zoom, along with 8 of the 10 largest U.S. banks and 8 of the 10 largest U.S. retailers.
The COVID-19 pandemic found people working from home and needing a way to communicate with their coworkers.
Zoom was cheap and easy to use.
That led the company’s stock to trade as high as $588 in October 2020.
At writing, shares are down more than 62% year to date, although the company’s enterprise customers increased 14% from the same quarter last fiscal year. And its average monthly churn (change in customer base due to loss of existing customers and addition of new customers) is 3.1% for Q3, down 60 basis points from the same quarter last fiscal year.
Source: Zoom Video Communications
Of course, Zoom isn’t growing as rapidly as it was a couple of years ago, when its revenues went from $622 million in 2019 to $2.6 billion in 2020.
But the stock action shows how wild expectations were in 2020 and how much this inflated shares.
Source: Stock Analysis
ZM was on an explosive growth path a few years ago. Its revenues climbed from $151 million in 2017 to 2019’s $622 million. Revenues surged more than $4 billion in 2021.
But that growth is slowing down, which is concerning some investors.
Over the last 12 months, the company hit $4.3 billion in revenues. Yet its quarterly earnings fell 85.8% year over year (YoY).
Unlike many other tech companies, though, Zoom generates free cash flow, is profitable, and isn’t drowning in debt.
ZM has $1.29 billion in operating cash flow and $5.16 billion in cash. Its debt is minimal at $99.8 million. And it’s financially stable, with an impressive 3.2x current ratio (current assets divided by current liabilities).
Source: Seeking Alpha
ZM trades at a P/E GAAP ratio of 30.5x, a significant haircut from October 2021, when it was trading at 82.9x.
Moreover, it’s relatively cheaper than other work-from-home app companies like Asana (ASAN), Atlassian (TEAM), and DocuSign (DOCU), which have yet to turn a profit.
On the other hand, ZM trades at a higher multiple than Dropbox (DBX)’s 24.7x, although they’re not direct competitors.
ZM trades at a price-to-sales ratio of 4.7x, a far cry from its 22.8x in October 2021.
Compared to other work-from-home apps, it’s currently lower than ASAN at 5.3x and TEAM at 12.4x, but slightly higher than DBX at 3.7x and DOCU at 4.6x.
Source: Seeking Alpha
ZM expects its enterprise business to grow in the low-to-mid 20s percentage-wise, while it expects its online business to lose approximately 8% for the year. But the company is focused on improving efficiency and profitability.
Its EBIT margin of 15.9% is notably higher than ASAN at -77.7%, TEAM at -6.5%, DOCU at -3.2%, and DBX at 15.6%.
In addition, it generates $1.29 billion a year in cash from its operations, much better than ASAN at -$168.2 million, TEAM at $910 million, DOCU at $457 million, and DBX at $765 million.
ZM has a net income margin of 16%, which is better than DBX at 15.2%, DOCU at -5.4%, TEAM at -7.2%, and ASAN at -79.1%.
Source: Seeking Alpha
One concern investors have with ZM is its slowed growth. But it’s unrealistic to think it can keep growing at the blistering pace it did a couple years ago.
Nonetheless, its revenues grew 11.1% YoY, which is higher than DBX at 9.3%, but not as strong as ASAN at 51.9%, TEAM at 33.5%, and DOCU at 24.5%.
Many economists predict a recession in 2023, but ZM continues to experience strength in its enterprise business, showcasing its platform’s value proposition even during more difficult economic times.
Our Opinion 8/10
Zoom’s enterprise business represents 56% of the company’s revenue, up from 49% a year ago.
We believe this will help ZM as we enter a rougher economic patch.
Plus, the company has plenty of cash to weather the storm.
Shares are currently trading near their 52-week low, a level we think is good to start a position at.
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