Downward Momentum for Zoom Video Communications Continues. Prices at $76.54.

Software company Zoom Video Communications stunned Wall Street today as it plummeted to $76.54, marking a -4.6% change compared to the S&P 500 and the Nasdaq indices, which logged 1.2% and 1.2% respectively. ZM is -21.77% below its average analyst target price of $97.84, which implies there is more upside for the stock. However, the average analayst rating for the stock is hold -- a more pessimistic outlook than you might expect. Over the last year, Zoom Video Communications has lagged behind the S&P 500 by -45.4%, moving -61.2%.

Zoom Video Communications's trailing 12 month P/E ratio is 24.3, based on its trailing Eps of $3.15. The company has a forward P/E ratio of 20.9 according to its forward Eps of $3.66 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Zoom Video Communications's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -1.91. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing ZM's growth potential .

To better understand the strength of Zoom Video Communications's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2022-01-31 4,099,864,000.0 2,969,373,000.0 27.57 10.77
2021-01-31 2,651,368,000.0 1,991,520,000.0 24.89 1120.1
2020-01-31 622,658,000.0 609,962,000.0 2.04 9.09
2019-01-31 330,517,000.0 324,350,000.0 1.87 n/a
  • Average operating margins: 14.1%
  • Average operating margins growth rate: 380.0%
  • Coefficient of variability (lower numbers indicate less volatility): 99.8%

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Zoom Video Communications's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2022-01-31 1,605,266,000.0 -132,590,000.0 1,472,676,000.0 5.86
2021-01-31 1,471,177,000.0 -79,972,000.0 1,391,205,000.0 1122.41
2020-01-31 151,892,000.0 -38,084,000.0 113,808,000.0 396.98
2019-01-31 51,332,000.0 -28,432,000.0 22,900,000.0 n/a
  • Average free cash flow: $750,147,250.00
  • Average free cash flow growth rate: 508.4%
  • Coefficient of variability (the lower the better): 105.2%

Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ZM is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Zoom Video Communications's P/B ratio is 3.9, telling us that the market value of the company exceeds its book value by a factor of 3, but is still below the average P/B ratio of the Technology sector.

As of third quarter of 2022, Zoom Video Communications is likely undervalued because it has a lower P/E ratio than the sector average, a lower P/B ratio than the sector average, and a pattern of improving cash flows with an upwards trend. The stock has poor growth indicators because of its shrinking operating margins and a negative PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.