What You Need to Know About ZM

One of today's standouts was Zoom Video Communications, a software company whose shares are up 3.6%, outperforming the Nasdaq by 4.0%. At $70.29, its shares are -8.26% below their average analyst target price of $76.62.

The average analyst rating for the stock is hold. ZM may have outstripped the S&P 500 index by 3.0% today, but it has lagged behind the index by -19.0% over the last year, returning -5.0%.

Zoom Video Communications, Inc. provides unified communications platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.

The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.

Zoom Video Communications's trailing 12 month P/E ratio is 92.5, based on its trailing EPS of $0.76. The company has a forward P/E ratio of 15.0 according to its forward EPS of $4.7 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 35.0, 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.

Zoom Video Communications's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 9.15 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Zoom Video Communications's gross profit margin trends:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023 4,392,960 3,047,080 31 -40.38
2022 4,099,864 1,981,719 52 -7.14
2021 2,651,368 1,169,531 56 166.67
2020 622,658 494,566 21 5.0
2019 330,517 263,349 20
  • Average gross margin: 36.0 %
  • Average gross margin growth rate: 8.9 %
  • Coefficient of variability (lower numbers indicating more stability): 256.8 %

We can see from the above that Zoom Video Communications business is not strong and its stock is likely not suitable for conservative investors.

Zoom Video Communications's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 1,290,262 103,826 1,186,436 -19.44
2022 1,605,266 132,590 1,472,676 5.86
2021 1,471,177 79,972 1,391,205 1122.41
2020 151,892 38,084 113,808 396.98
2019 51,332 28,432 22,900
  • Average free cash flow: $837.4 Million
  • Average free cash flow growth rate: 120.2 %
  • Coefficient of variability (lower numbers indicating more stability): 176.8 %

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 first quarter of 2023, the mean P/B ratio of the technology sector is 7.92, 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 2.89, indicating that the market value of the company exceeds its book value by a factor of more than2, but is still below the average P/B ratio of the Technology sector.

Since it has an inflated P/E ratio, a lower P/B ratio than its sector average, generally positive cash flows on an upwards trend, Zoom Video Communications is likely fairly valued at today's prices. The company has poor growth indicators because of no PEG ratio and weak operating margins with a positive growth rate. We hope you enjoyed this basic overview of ZM's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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.