Zoom Stock Gets Hammered: Is it Time to Sell?

Uncover - Zoom stock

Author: Tim Phillips

December 2, 2020

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Zoom Video Communications Inc (NASDAQ: ZM) posted triple-digit revenue growth in its latest quarter but shares fell 15%. Is this the end of the Zoom rally?

Tim’s Take:

Zoom Video posted 367% year-on-year growth in its third-quarter (for the three months ending 31 October) fiscal year 2021. That ended up being a figure of US$777 million versus US$167 million in the same quarter last year.

It’s been an interesting journey so far in 2020 for Zoom investors – the stock is still up about six-fold since the start of the year, even after yesterday’s 15% fall.

So, what gives? Basically, the sell-off was sparked by investor doubts over whether Zoom can keep this sort of growth up when the Covid-19 vaccine is widely distributed and a sense of “normalcy” returns.

Expected sell-off on vaccine

I think it’s safe to say that +300% revenue growth isn’t on the cards for Zoom in 2021. Not only because of the extraordinarily higher base of comparison from this year, but also because the company’s market cap is now over US$110 billion.

Yet, that ignores the fact that Zoom, driven by CEO and founder Eric Yuan, is continuing to innovate. We all knew that a vaccine would eventually arrive (it’s not exactly a surprise), so this “sell on good news” dilemma isn’t all that confusing.

Beyond that, the company continues to throw off insane amounts of free cash flow and has been quietly reducing its reliance on the US market as Asia and Europe make up an increasing proportion of revenue (see below).

Zoom regional revenue

Source: Zoom Video Communications Q3 2021

Another less talked-about point is the fact that Zoom’s margins have actually contracted throughout this pandemic.

In an effort to provide adequate bandwidth for free users earlier this year, amid a surge in demand for Zoom, its gross margin actually fell from the early-80% range last year to around 67% in the latest quarter.

As demand normalises somewhat (as no doubt it will next year) margins should creep back up and that could provide Zoom with a meaningful boost to the bottom line.

Shall we Zoom?

Besides the valuation concerns (Zoom trades at about 50x price-to-sales), a bigger long-term doubt has been whether it can keep hold of its leadership position in the face of Microsoft Corporation’s (NASDAQ: MSFT) Teams offering.

This week’s news that Slack Technologies Inc (NYSE: WORK) will be taken over by Salesforce.com Inc (NYSE: CRM) highlighted the competitive threat that Teams posted to Slack’s office productivity tools.

Yet when we video call, most of us still use Zoom. Teams and Google Hangouts work fine but the majority of individuals still use Zoom because it offers the best experience for users.

Long-term investors should view Zoom as a stock that will be much bigger in five years’ time than it is today.

With the host of initiatives that Eric Yuan has in the pipeline, Zoom is only like to further integrate itself into our lives over the next decade.

Disclaimer: ProsperUs Head of Content owns shares of Zoom Video Communications Inc and Microsoft Corporation.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.