Investors should usually be excited when a stock declines as it represents an opportunity to buy the company at cheaper prices (unless they already own it). A value investor would be excited to see an iconic growth stock like Zoom Video Communications Inc. (ZM, Financial) drop from $478 to $70, and even more excited to see a 2023 consensus earnings per share estimate of $4.21, which would put the stock selling at a very reasonable 16 times earnings. This could be a value investor's dream - or is it?
Zoom was one of the most prominent beneficiaries of the Covid-19 pandemic as months of lockdowns and business shutdowns led to the necessity of communicating over video conferencing. Although many video chatting options existed at the time of the pandemic, Zoom became the go-to leader in this area. The company achieved profitability in 2019, but beginning in early 2020, saw a remarkable global increase in total usage due to the pandemic.
The company provides a comprehensive unified communications platform on a global basis. Zoom meetings incorporate HD video, voice, chat and content sharing through mobile devices, desktops, laptops, telephones and conference room systems. Other products and services include Zoom Phone, Zoom Chat, Zoom Rooms and Zoom Calendar.
Founded in 2011, the company currently has a market capitalization of $20 billion.
Financial review
In February, the company reported financial results for the 2023 fiscal year, which ended on Jan. 31. Total revenue increased 7% to $4.4 billion and increased 9% on a constant currency basis to $4.46 billion. The important enterprise segment increased revenue 24%, while in the consumer and small business segment, revenue decreased 8%.
GAAP income from operations for the year was $245.4 million compared to $1.06 billion for fiscal 2022. Non-GAAP income was $1.58 billion, which was a decrease from $1.66 billion in the prior year. Non-GAAP operating income adjusts for stock compensation expense, litigation settlements and acquisition-related expenses.
Non-GAAP net income for the year was $1.33 billion, or earnings per share of $4.37. In fiscal year 2022, non-GAAP net income was $1.55 billion, or $5.07 per share.
The company does generate free cash flow despite low levels of profitability. Free cash flow for the fiscal year totaled $1.2 billion, which was a decrease from $1.47 billion in 2022. The company maintains a large cash position of $5.4 billion on the balance sheet with no traditional long-term debt.
In a statement, Zoom founder and CEO Eric Yuan said:
“In fiscal year 2023, our growing base of Enterprise customers increasingly looked to Zoom to provide a seamless communication and collaboration platform, and drive productivity and efficiency during turbulent times. This was evident in the 27% growth in customers contributing more than $100,000 in trailing 12 months revenue, as well as the 115% trailing 12-month net dollar expansion rate for Enterprise customers. Zoom One adoption continued to accelerate and helped drive Zoom Phone to grow more than 100% year over year, surpassing 5.5 million seats in Q4. Our emerging technologies such as Zoom Contact Center picked up pace as customer experience teams recognized the value of a modern, integrated collaboration solution. While the macroeconomic situation continues to negatively impact our overall growth, we have maintained a healthy balance sheet and operating cash flow generation of approximately $1.29 billion.”
Valuation
The first-glance, cheap valuation on earnings estimates does not hold up as there remains a large spread between GAAP earnings and non-GAAP earnings. Analyst consensus earnings per share for the fiscal year ending January 2024 is $4.21. However, that is non-GAAP earnings. GAAP earnings estimates are for a loss of approximately $1 per share, so price-earnings ratios are not relevant in this case.
The GuruFocus discounted cash flow calculator creates a value close to today’s stock price when using the non-GAAP estimate of $4.21 and a 10% long-term growth rate. The company is currently not growing its earnings per shares as it normalizes its business after the Covid-19 pandemic has wound down.
Based on the 20 analysts that have current ratings on the stock, the average price target is $84 with a high estimate of $100 and a low estimate of $68.
The company does not pay a dividend, but has been an active repurchaser of its own common stock, albeit at much higher prices.
Guru trades
Gurus who have added to their Zoom positions recently include Catherine Wood (Trades, Portfolio) and Ken Fisher (Trades, Portfolio). Investors that have reduced or sold out of their positions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Baillie Gifford (Trades, Portfolio).
Summary
Zoom appears to be fairly valued based on a DCF calculation, but the lack of positive GAAP earnings continues to be worrisome. The trend of companies forcing their employees to return to an office environment still creates headwinds for the company. In addition, competition has intensified, particularly with the growing presence of Microsoft's (MFST) Teams.
It may be warranted for investors to take a wait-and-see approach with the stock.
