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Zoom Stock: Plenty of Growth Potential Remains
Stock Analysis & Ideas

Zoom Stock: Plenty of Growth Potential Remains

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Zoom’s recent quarter was encouraging. While the company can hold its own if there were to be an upcoming recession, the competition is heating up. Zoom CEO Eric Yuan will need to keep tabs on rivals or run the risk of being stuck in the gutter it currently finds itself in.

Shares of Zoom Video Communications (ZM) have looked to stabilize in the $85-110 range in recent months. Though it’s impossible to tell if a bottom is in, the recent round of quarterly results is nothing short of encouraging. Zoom will probably never see another pandemic-era boom again, but that does not mean the growth is gone.

While the pandemic pull-forward in demand was remarkable, it’s worth noting that the ongoing digital transformation is a secular trend that will keep the video-conferencing service provider zooming higher when the time comes. Unlike Peloton (PTON), Zoom has a growth pathway to move on from the great tech sell-off of 2021-22. The recent quarterly beat confirms that Zoom is still an innovator that may have overshot to the downside.

Though the same negative macro factors are still in, like the potential for a recession and the higher-rate environment, I’d argue that Zoom is a firm that’s more than capable of innovating its way through recent storm clouds.

Further, the next recession may be more devastating to consumers than enterprises, making Zoom an intriguing option that may be able to stage a comeback even as everything else folds.

Zoom stock looks too cheap at 26.8 times trailing earnings and 7.7 times sales, given its growth profile and recent resilience. I remain bullish on the stock.

Zoom Stock Zooms Higher Following Solid First Quarter

Zoom stock’s first quarter saw decent revenues alongside robust profitability numbers. In a market where investors care more about profits and margins than sales growth, Zoom was rewarded handsomely for the numbers and its upbeat profitability outlook.

The company is still moving through a “hangover” period due to the 2020 pandemic pull-forward in demand. However, Zoom’s “hangover” is likely to pass quicker than most other pandemic winners.

Software offerings beyond just conference calls have been faring quite well, with Zoom Rooms and Contact Center seeing solid results. Indeed, Zoom is still one of the major players in the ongoing digital transformation.

As companies continue leveraging zoom calls to collaborate with remote workers, Zoom may be far more recession resilient than expected. Indeed, the first-quarter numbers were far better than feared, inducing a nice relief rally for the beaten-down growth stock.

Zoom won over a lot of new business during pandemic-era lockdowns. Many customers are sticking around, and it’s these such customers that Zoom will be able to upsell with new value-adding solutions. When you’ve got a platform that’s so ingrained in how many firms do business, the impact of a recession could prove more benign.

Improving Margins While Investing in Growth?

Zoom has levers it can pull to improve upon margins while also continuing to add to its innovative line-up. The company has moved beyond video-conferencing to various collaboration tools. While margin-enhancing initiatives will be more rewarded by investors, I still think Zoom has to put its foot on the gas regarding R&D spending.

You see, Zoom has a lot of rivals that could move in if it fails to stay on the cutting edge of video-first collaboration.

Apple (AAPL) is dipping a toe into the enterprise with its Apple Business Essentials service and new collaboration tools coming to its latest iOS and iPadOS operating systems. Indeed, Apple is still primarily a consumer-facing business. However, its move into enterprise services could be a big deal that challenges Zoom Video in the workplace collaboration market.

Apple: A Deep-Pocketed Zoom Competitor

Apple’s Facetime links seem to take a page right out of the book of Zoom Video. Furthermore, Apple is poised to become a dominant player in collaboration tools with its new whiteboard feature “Freeform,” unveiled at its latest WWDC conference. Again, the “Freeform” app seems to be the answer to Zoom’s Whiteboard offering.

As Apple breathes down Zoom’s neck, the company will need to keep firing on all cylinders. Otherwise, it could run the risk of losing share to a very scary competitor that’s doubling down on the workplace.

I think Apple is a disruptor that should be taken very seriously. Zoom may have been the best-in-breed during 2020, but rivals are catching up, with Apple that’s hungry to make a big splash in the world of the enterprise.

The digital transformation trend will benefit many innovators. Zoom and Apple can both be winners. However, Zoom will need to be mindful of increasing competition and find the right balance of margins and reinvestment if its stock is to trend higher again.

Wall Street’s Take

Turning to Wall Street, ZM stock comes in as a Moderate Buy. Out of 21 analyst ratings, there are eight Buy recommendations and 13 Hold recommendations.

The average Zoom Video price target is $125.84, implying upside potential of 13.7%. Analyst price targets range from a low of $90.00 per share to a high of $190.00 per share.

The Bottom Line on Zoom Stock

Zoom’s recent quarter was encouraging. While it can hold its own, come the next recession, Zoom CEO Eric Yuan will need to keep tabs on rivals or run the risk of being stuck in the gutter it currently finds itself in.

I think Yuan is a great innovator, and Zoom will not back down without a fight as more firms target video-first collaboration amid the rise of the remote work world.

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