Video conferencing software company Zoom Video (ZM) posted better-than-expected fourth-quarter results and provided a positive earnings outlook for the current quarter. Moreover, given the rise in demand for technology and services supporting remote work, the stock might be an ideal buy. Keep reading.
Following the COVID-19 pandemic, remote work culture has gained significant popularity. As companies and employees embrace the flexibility and convenience of remote work, the demand for technology and services that support this trend has also grown rapidly.
Zoom Video Communications, Inc. (ZM) enables people to connect from anywhere in the world, making it suitable for remote work and online learning. Hence, I think this stock stands to benefit from the rise of remote work, and could be worth buying. In this piece, I've explained why.
As the world continues to adapt to the new normal, many companies and workers are reevaluating the traditional 9-5 office-based work model. With remote work becoming increasingly prevalent among companies seeking to improve worker retention, many workers are embracing a new lifestyle - the digital nomad.
Since the start of the pandemic, the number of digital nomads with traditional jobs has more than tripled. In addition, the number of American workers identifying as digital nomads have risen by an incredible 131% since 2019 to reach 16.9 million people.
As a result, remote work will become more prevalent in the coming years as businesses recognize its benefits and embrace digital transformation.
ZM reached peak highs in the pandemic. While its demand has reduced since then, the company is consistently trying to expand its customer base. In November 2022, ZM announced new features and enhancements to improve team collaboration and customer experience.
The new features include Zoom Mail and Calendar Clients, an end-to-end encrypted email service, and a new virtual coworking space called Zoom Spots that enables remote teams to have fluid conversations.
Moreover, recently ZM and Major League Baseball (MLB) announced a first-of-its-kind partnership for the league aimed to enhance MLB games and the fan viewership experience.
As the new Official Unified Communications Platform of MLB, Zoom Contact Center and the Zoom platform technology will power new elements of Major League games and broadcasts. By partnering with a major sports league such as MLB, ZM can increase its brand visibility and reach a wider audience.
Additionally, during the fiscal fourth quarter, ZM reported adjusted earnings of $1.22 per share, exceeding analysts' expectations of 81 cents per share, and generated revenue of $1.12 billion, which also surpassed the estimated $1.10 billion.
ZM has also provided positive financial guidance for the fiscal first quarter, estimating total revenue between $1.08 billion and $1.09 billion. Also, non-GAAP income from operations is expected to be between $374 million and $379 million, and non-GAAP EPS between $0.96 and $0.98 with approximately 304 million non-GAAP weighted average shares.
Furthermore, shares of ZM have gained 5% over the past three months, closing the last trading session at $69.19.
Here is what could influence ZM's performance in the upcoming months:
Solid Top-Line Growth
ZM's revenue rose 4.3% year-over-year to $1.12 billion during the fiscal fourth quarter that ended January 31. The company's gross profit increased 1.2% year-over-year to $823.45 million. Moreover, its non-GAAP net income was $366.55 million, or $1.22 per share.
Moreover, in the fiscal year that ended January 31, ZM's revenue grew 7.1% year-over-year to $4.39 billion. The company's gross profit increased 8.1% year-over-year to $3.29 billion. Also, its non-GAAP net income stood at $1.33 billion, or $4.37 per share.
According to the report, ZM experienced a 27% growth in customers contributing more than $1 million in trailing-12-months revenue in the fiscal year 2023. In the fiscal fourth quarter, the adoption of Zoom One continued to accelerate and helped Zoom Phone grow more than 100% year over year, surpassing 5.5 million seats. Also, emerging technologies such as Zoom Contact Center gained momentum.
Discounted Valuation
In terms of forward non-GAAP P/E, ZM is currently trading at 16.35x, which is 20.1% lower than the 20.46x industry average. Its 0.49x forward EV/EBITDA multiple of 8.71 is 34.6% lower than the 13.31x industry average.
Additionally, the stock's forward Price/Book multiple of 2.72 is 23.7% lower than the industry average of 3.56x, while its forward EV/EBIT multiple of 9.21 is 43.3% lower than the industry average of 16.24.
Robust Profitability
ZM's trailing-12-month gross profit margin of 74.95% is 48.9% higher than the 50.35% industry average. Its 37.41% trailing-12-month levered FCF margin is 515.5% higher than the 6.08% industry average.
Furthermore, its trailing-12-month cash from operations of $1.29 billion is significantly higher than the industry average of $40.15 million. The stock's trailing-12-month ROTC and ROTA of 2.52% and 1.28% are higher than the industry averages of 1.97% and 0.70%, respectively.
POWR Ratings Reflect Promising Outlook
ZM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ZM has a B grade for Value and Quality, which is in sync with its discounted valuations and high profit margins.
ZM is ranked #26 in the 80-stock Technology – Services industry.
Click here to access ZM's Value, Momentum, Stability, Sentiment, and Quality ratings.
Bottom Line
Despite the tensed macroeconomic situation, ZM maintained a healthy balance sheet and generated approximately $1.29 billion in operating cash flow in the last fiscal year. ZM's revenue and EBITDA have increased at CAGRs of 91.8% and 124% over the past three years.
Moreover, the company added new features and enhancements in the last quarter to improve the user experience and provide more flexibility for businesses and remote workers.
With remote and hybrid working trends expected to remain, the stock could be a solid buy.
How Does Zoom Video Communications, Inc. (ZM) Stack up Against Its Peers?
While ZM has an overall POWR Rating of B, which translates to a Buy, one might consider looking at its industry peers, Celestica, Inc. (CLS), Serco Group plc (SCGPY), and NetScout Systems, Inc. (NTCT), which have an A (Strong Buy) rating.
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ZM shares fell $0.39 (-0.56%) in premarket trading Friday. Year-to-date, ZM has gained 2.14%, versus a 3.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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