With revenue and earnings growth expected to pull back in the years ahead, I wouldn’t be surprised to see growth-oriented investors exit their positions in Zoom stock. The slowdown in growth, combined with ongoing macroeconomic headwinds and geopolitical concerns, will put additional downward pressure on Zoom’s valuation for the foreseeable future. As a long-term investor, I don’t ignore past performance, but I’m generally more interested in where the company is heading. Zoom has provided investors with spectacular growth and returns in the past couple of years; however, I don’t see that continuing into the future.
Cash flow
More importantly, the growth in larger customers — those with more than 10 employees and those spending more than $100,000 in revenue — provides a large base to upsell new features and hardware options as Zoom’s offerings expand. Looking back at the last two years, there may be no stock more representative of the pandemic’s impact on the stock market than Zoom Video Communications (ZM 5.76%). After growing parabolically in 2020, the stock has come crashing back to earth and is down 45% year to date at the time of this writing.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Luke Meindl has no position in any of the companies mentioned.The Motley Fool owns and recommends Alphabet (A shares), Cisco Systems, Microsoft, and Zoom Video Communications. Zoom Video Communications (ZM 5.76%) rewarded shareholders who bought the stock prior to the pandemic, returning 391% in 2020. The company was a clear beneficiary of the work-from-home environment, a trend that is still very evident today.
Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1. ZM stock trades relatively undervalued at just 14.7 times forward earnings. Our proprietary Zacks ESP indicator is not conclusively predicting another earnings beat.
Zoom has delivered an average earnings surprise of 17.8% over the past four quarters. In addition to that, I don’t think Zoom is currently trading at an attractive-enough valuation — investors who are still excited about the stock may be atfx broker review wise to wait for a larger decline before considering an investment. However, Zoom has rapidly turned into a value stock that returns a respectable level of free-cash-flow growth.
Zoom Video Communications, Inc. (ZM) Is a Trending Stock: Facts to Know Before Betting on It
Zoom even initiated new growth efforts, what is amarkets building out an artificial intelligence (AI)-driven communications ecosystem. Then there is the endorsement of Ark Investment Management’s CEO Cathie Wood, whose bold predictions regarding other tech stocks (like Tesla and Bitcoin) have come to pass. Wood and her team predicted a $1,500-per-share price target for Zoom by 2026, a 22-fold gain from current levels. To make the decision even easier, Zoom is trading at or near its low for price-to-earnings (P/E) and price-to-sales (P/S) ratios. Whereas during the pandemic the case could be made that the company’s valuation got ahead of itself, it’s clear now that the valuation is more in line with, if not underestimating, Zoom’s fundamentals.
The significant climb in free cash flow was a result of superb revenue growth stemming from pandemic-driven demand. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +24.10% per year.
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- With revenue and earnings growth expected to pull back in the years ahead, I wouldn’t be surprised to see growth-oriented investors exit their positions in Zoom stock.
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They include legacy web-based meeting service providers such as Cisco Systems Inc.’s (CSCO) WebEx and LogMeIn Inc.’s GoToMeeting. Rivals also include bundled productivity solution providers with video functionality such as Alphabet Inc.’s (GOOGL) Google G Suite and Microsoft Inc.’s (MSFT) Microsoft Teams. Other competitors are unified communications as a service (UCaaS) and legacy private bank exchange (PBX) providers such as 8×8 Inc. (EGHT), Avaya Holdings Corp. (AVYA), and RingCentral Inc. (RNG). On the earnings front, Wall Street analysts are forecasting an average annualized growth of 28% over the next five years up to an earnings per share of $6.21 per share in fiscal year 2026. This is more favorable than Zoom’s expected top-line scenario, but many investors still might be hesitant to pay a lofty valuation for the company when taking into account the deceleration in growth.
Zoom Video Communications Inc. (ZM) offers a video-first communications platform used by millions of people worldwide for both business and personal use. The platform connects people via video, phone, chat, and content sharing and can be integrated across a broad range of devices. The investment community will be closely monitoring the performance of Zoom Video Communications in its forthcoming earnings report. The company is scheduled to release its earnings on November 25, 2024.
This is especially stark when compared to the S&P 500, which is up 27% on the year. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Between the AI tool and its expected growth in hybrid and remote knowledge workers, Ark Invest believes Zoom’s average revenue per user (ARPU) will grow by 26% yearly.
How many shares of Zoom (ZM) stock are there?
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