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Zoom: Great Company With a Pricey Stock
Stock Analysis & Ideas

Zoom: Great Company With a Pricey Stock

In a post-coronavirus world, everyone knows Zoom Video Communications (ZM). This Covid growth story is firmly planted in the public’s consciousness – all the way from C-suite boardrooms to technophobe grannies’ living rooms.  

Although the company is continuing to show signs of healthy growth now Covid-19 is on the backfoot, Needham’s Ryan Koontz thinks there are several factors that need to be taken into consideration when mulling an investment in the pandemic era’s star performer.

“While the company issued an impressive F1Q22 report with 191% y/y revenue growth and better than expected GM, we look for continued traction with Phone, particularly in enterprise, evidence of stable churn in small business, further success in the channel and/or more clarity on the monetization timing for Zapps and Zoom Events before gaining more conviction on the stock at its current valuation.”

Of course, Koontz does not think Zoom is a bad company with muted prospects. Zoom used the pandemic as a springboard to quickly establish itself as the “new leader in Meetings Solutions.” Along with its Phone offering being well-positioned to take share in a telephony market, which by 2024, IDC estimates will be worth over 23 billion, Zoom has “minimal customer concentration risk.” None of its customers generate over 10% of the company’s revenue.

As of F2Q21, Zoom also counted 88 customers with over $1 million ARR (annual recurring revenue), and the company now has over 497,000 customers with 10 employees or more.

That said, it is due to the 37% of total revenue the company brings in from customers with less than 10 employees, which makes Koontz concerned churn could meaningfully rise in the post-pandemic world. As such, the analyst fears “increased churn at the low end of the market could become a headwind before new Events and Platform sales reach scale.”

Moreover, from a purely investing perspective, although ZM shares trade at an EV/Sales multiple “slightly below comparable high-growth SaaS category leaders,” the stock is currently valued at a “healthy premium” to cloud communications leaders FIVN, RNG and TWLO.

As such, Koontz rates ZM shares a Hold, without suggesting a price target. (To watch Koontz’ track record, click here)

So, that’s Needham’s view, what does the rest of the Street make of Zoom’s prospects? Looking at the consensus breakdown, based on 8 Buys, 9 Holds, and one additional Sell, the analyst consensus rating is a Moderate Buy. Going by the $407.81 average price target, the shares are anticipated to be changing hands for a 9% premium a year from now. (See Zoom stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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