(Michael Li University of Bath, Shalin Kothari)
Background:
Zoom Video Communications leads the market in online chat services, having seen a major surge in revenues in the early months of 2020, induced by the stay-at-home policies implemented by governments in response to the Covid-19 pandemic. The sudden restriction on physical interactions has forced people to meet via video communication for personal and occupational purposes, with Zoom being the main beneficiary of this transition. The service allows up to 100 participants (500 for large businesses), (Zoom, 2020), to interact making it an incredibly effective platform to host conferences or social gatherings during lockdown. Zoom offers 4 different plans, one of which is free to increase awareness and accessibility, with more expensive monthly subscriptions offering perks (such as unlimited call lengths) to generate additional income. This cloud service has proved to the world that employees can operate efficiently from home; opening up a wealth of opportunities for future jobs and forcing companies to rethink how to optimise performance. Zoom’s influence has been felt internationally, and it is continuing to connect people across countries all over the world.
| ZOOM Video Communications, Inc. | 30/06/2019 | 30/09/2019 | 31/12/2019 | 31/03/2020 | Latest |
| Price/Sales | 51.57 | 39.25 | 30.84 | 55.78 | 92.50 |
| Price/Earnings | 114420.10 | 4025.14 | 2163.37 | 1793.96 | 1532.00 |
| Price/Free Cash Flow | 493.00 | 393.33 | 183.32 | 325.89 | 218.26 |
| Price/Book | 32.88 | 28.02 | 24.34 | 50.48 | 81.49 |
| Return on Equity % | n/a | 2.65 | 2.81 | 4.13 | 6.32 |
| Earnings Yield % | 0.00 | 0.020 | 0.050 | 0.060 | 0.070 |
| Enterprise Value (Bil) | 22.93 | 20.09 | 17.99 | 40.26 | 72.37 |
| Enterprise Value/EBITDA | 1234.48 | 876.08 | 676.17 | 1381.49 | 1365.70 |
Overview:
Zoom’s share prices are currently valued at $260.44 as of 22nd July 2020, down from a record high of $275.87 earlier in the month. Market capitalisation has more than quadrupled since the start of the year (macrotrends, 2020) whilst the enterprise value (EV) has more than doubled. With social distancing measures in place, the company has reaped the rewards of stay-at-home policies which has introduced a new wave of demand for online video conference services in recent months.
Having joined the NASDAQ 100 index at the end of April 2020 (The Motley Fool, 2020), Zoom has proved to be one of the strongest unicorn companies out there. Reaching its $1bn valuation in January of 2017 (Iqbal, 2020), Zoom went from reporting around 10 million daily users last December to over 300 million in the space of 5 months. More importantly company growth and recorded profits have consistently increased since 2018, with figures set to skyrocket further in 2020. There is no denying the opportunity for expansion is limitless, the question is whether this growth can be sustained to justify investing at the current market price.
Analysis:
Zoom appears to be an unattractive stock for value investors given its incredibly high price/earnings (P/E) ratios which have consistently been well above 1000 in the last year.
Of course, to really understand the significance of this ratio, we must look to competitors such as Citrix systems who offer a similar web service called “GoToMeeting”. Whilst they do not specialise to the degree of Zoom, the current P/E ratio for Citrix is 28.99, up from 20.67 last September (macrotrends, 2020), suggesting this stock is relatively cheaper for investors. However, we must also consider that Citrix operates in many more divisions and therefore its stock prices may be influenced by its diversity. The P/E ratio is calculated by dividing share over earnings per share (EPS) which goes further to explain the high ratios for Zoom. Newly listed companies often take time to generating positive EPS figures, with the likes of Uber still seeing negative EPS returns. This highlights the highly admirable progress made by Zoom since its recent public listing and investors can expect the high ratios to fall as expected EPS growth looks extremely promising.
The price/book (P/B) ratios tell a similar story of overvaluation and offers additional context. Zoom’s P/B has tripled since the initial outbreak of Covid-19 resulting in its stock price sitting over 80 times its book value. This highlights a significant risk for investors as it strongly indicates company overvaluation since the current asset values do not support the stock price, likely due to a bubble created by recent expectations. However, Zoom is expected to invest and develop the security of their services drastically in the near future as they don’t want to fall behind competitors who are seeking to implement improved technology into their systems. This provides evidence justifying a perhaps initially surprising P/B ratio showing that context should never be overlooked.
Further delving into company assets and financial health provides extremely promising signs for investors. Currently Zoom is debt free, a luxury that not many companies can boast. As a result, interest payment is not a concern in the long run meaning that Zoom will be able to cover both short-term and long-term liabilities (standing at $1.03b and $132.35m respectively) with current assets of $1.8b. The extremely low long-term liabilities show what having no debt and interest coverage can do for maintaining a positive balance statement in the long run. However, as Zoom expands it is likely more liabilities will be created through increased debt and equity payments to shareholders.
Conclusion:
Recommendation- BUY
This recommendation essentially recommends that there is no unanimous approach for all investors, but instead is tailored for both value and growth investors. Value investors will be put off by Zoom’s overvaluation of 180% (Simply Wall St, 2020) based on company performance making it an investment they will certainly avoid. On the other hand, this investment will seem far more appealing for growth investors as Zoom’s forecasted annual revenue growth stands at 24.0% (Simply Wall St, 2020), far higher than the expected industry and market growth of 12.1% and 9.2% respectively. This demonstrates a silver lining in the stock market amidst a catastrophic year that saw many household names declare for bankruptcy. Like Tesla, there is no doubt that there is a bubble around Zoom’s stock hence the significant overvaluation figures provided by analysts, however despite the bubble share value is expected to continue growing.
Throughout the lockdown firms have seen two responses amongst workers, the slackers and high achievers with the slackers showing decreased productivity and high achievers working above and beyond to impress employers. This shows the potential for sustained increases in productivity that can be achieved by employees working in the comfort of their homes. The slackers were always a threat to working from home but solutions such as bringing them back into the office first, given social distancing, will allow overall to productivity to increase. In late 2019 Microsoft Japan trialled a 4-day workweek, that saw productivity increase by 40% (Paul, 2019), providing further incentive to restructure the work life balance and implement seemingly unprecedented methods into everyday life. As demand for change increases and companies become more aware, companies like Zoom will be amongst the key beneficiaries as when face to face interaction decreases, reliance on video communication increases.
Overall, further insight into company data and consideration of the changing world both add weight to Zoom’s bright future that lays ahead, suggesting that investors, especially growth investors, should strongly consider buying Zoom shares as of July 2020.
Bibliography
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macrotrends, 2020. Citrix Systems PE Ratio 2006-2020 | CTXS. [Online]
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Industry Jargon:
- Price/Sales Ratio: The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues.
- Enterprise Value/EBITDA (EV/EBITDA): Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple looks at a firm in the way that a potential acquirer would by considering the company’s debt. tocks with an enterprise multiple of less than 7.5x based on the last 12 months (LTM) is generally considered a good value.
- Enterprise Value: Enterprise value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover.
- Price/Earnings ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. (Investopedia, 2020)
- Unicorn company: A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. (Investopedia, 2020)
- Value investing: An investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. (Investopedia, 2020)
- Growth investing: Growth investing is an investment style and strategy that is focused on increasing an investor’s capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market. (Investopedia, 2020)
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