Owning shares of Zoom Video Communications (NASDAQ:ZM) during the first six months of the pandemic was a dream. Capable video-conferencing software became an absolute necessity for businesses overnight, and the path of least resistance was Zoom's easy-to-start and easy-to-use product.
Zoom's revenue soared as businesses scrambled to enable employees to work from home. The subscription-software company's sales more than quadrupled last year to $2.65 billion, and profits went from minimal to extravagant. The stock price followed suit, gaining about 360% between March and October last year.
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No longer zooming
Even though Zoom's financial results continued to impress through much of 2021, the stock has been steadily declining for the past year. Zoom stock reached an all-time high of $588 last October. Today, trading at around $260 per share, the pandemic darling is down 55% from that high.
The stock market is forward looking. It's clear that investors have been worried about what will happen to Zoom once the pandemic is over, and that worry has contributed to the stock's decline. The video-conferencing software market isn't going away, and the pandemic almost certainly accelerated adoption of the technology. But the end of the pandemic represents a sea change for Zoom.
In the first months of the pandemic, businesses that abruptly found themselves with remote employees had no choice but to pay for video-conferencing software. It didn't matter how much it cost; what mattered was getting up and running quickly.
There are plenty of video-conferencing options, but many of them are geared toward larger enterprises or tied to legacy systems. If a company was already a Cisco customer, using WebEx made sense. For many companies, though, Zoom was the obvious choice.
Even though the pandemic isn't over, the environment today is very different. Companies that absolutely needed to adopt Zoom's software have already done so. Some of those companies are starting to bring workers back to the office. While remote work will probably be more prevalent in the post-pandemic world than in the past, plenty of workers will no longer be using Zoom as often.
Companies that frantically adopted Zoom last year can now take a breath and decide whether it's the best solution. The urgency is gone. Zoom is starting to see smaller customers drop off the platform, and enterprise customers are taking more time to make buying decisions. The bonanza is over.
Growth hits a wall
Zoom expects to report lower revenue in its third quarter than it reported in its second quarter. It's possible that Zoom's revenue will eventually start to decline on a year-over-year basis as its customers adjust to the post-pandemic world.
The company is already seeing some of its pandemic-era growth start to unwind. Where the post-pandemic baseline for Zoom ends up settling is anyone's guess.
The company's attempted $14.7 billion acquisition of cloud contact-center platform Five9 was part of the company's plan to drive growth in the post-pandemic world, but that deal was scuttled due to regulatory concerns and the reality of Zoom's tumbling stock price. The all-stock deal was attractive for Five9 shareholders at the time of the offer, but not so much once Zoom's stock tanked.
It will be difficult for Zoom to make any major acquisitions using its stock as currency after the Five9 deal collapsed. The time for that was probably last year when the stock was soaring and confidence that it would keep soaring was high. The window of opportunity for Zoom to use its inflated stock to diversify via acquisitions appears to be closed.
Zoom stock is expensive based on its full-year guidance, but it's not that expensive. It expects to produce revenue of roughly $4 billion and adjusted earnings per share as high as $4.79 this year. That guidance represents a price-to-sales ratio of about 19 and a price-to-earnings ratio of about 55. Expensive, yes, but not crazy for a fast-growing company.
If Zoom stops being a fast-growing company -- which looks like will probably be the case at least for a while as the pandemic ends -- all bets are off. Will investors be willing to pay nearly 20 times sales for a software company that isn't growing much?
While Zoom is producing hefty profits today, that may not remain the case. If large numbers of businesses are essentially forced to pay for your software, of course you're going to be extremely profitable. As the pandemic ends, so does the absolute necessity of Zoom.
None of this is to say that Zoom is a bad company. Its product is easy to use and would have probably disrupted the video-conferencing market, even without a global pandemic. But the stock is pricing in a lot of growth, and it doesn't look like Zoom will be able to deliver. As growth grinds to a halt and margins slump, Zoom stock could fall off another cliff as investors reevaluate the pandemic darling.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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October 05, 2021 at 06:45PM
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How Much Further Could Zoom Stock Fall? - Motley Fool
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