Just a couple of years ago, it would have been hard to imagine Zoom Video Communications (NASDAQ:ZM) as a value stock. However, the once high-flying “stay-at-home” champion reached its peak in 2020 and now trades at a fraction of its all-time highs.
Zoom isn’t alone in this trend; many other market favorites from the COVID-19 pandemic era, including Teladoc (NYSE:TDOC), Peloton (NASDAQ:PTON), and Chegg (NYSE:CHGG), are also trading well below their peaks and have been underperforming the markets, similar to Zoom.
Despite these challenges, I believe Zoom’s current valuation presents a compelling value opportunity.
Zoom’s Growth Trajectory
A glance at Zoom’s financials reveals its growth slowdown. While the company experienced rapid revenue growth in fiscal years 2020 and 2021, with a staggering 325% rise in the latter, growth has since decelerated. Fiscal year 2023 saw revenue growth slow to 7.1%, and in fiscal year 2024, revenue rose by a mere 3.1%. This trend reflects the easing of pandemic-related restrictions on physical movement.
However, despite the sluggish revenue growth, Zoom has made significant strides in profitability and cash flow generation. Net income for fiscal year 2024 surged over six-fold compared to the previous year, and the company expects adjusted earnings per share to increase in the current fiscal year. Moreover, Zoom’s free cash flows have seen substantial growth, reaching $1.47 billion in fiscal year 2024.
Strong Financial Position
Zoom’s robust free cash flow generation has bolstered its financial position, with $7 billion in cash and cash equivalents and no long-term debt as of January. The company’s $1.5 billion share buyback further underscores its confidence in its cash-generating capabilities.
Attractive Valuation Metrics
Zoom’s valuation metrics suggest that the stock is undervalued. The next 12 months’ enterprise value to earnings before interest tax, depreciation, and amortization (EV-to-EBITDA) ratio is only 7.42x, and the next 12 months’ price-to-earnings (PE) multiple stands at 13.6x. Additionally, the next 12 months’ free cash flow to market cap ratio is 13.7x.
Looking Ahead
Analysts expect Zoom’s revenue growth to rebound in fiscal year 2025, albeit modestly. The company continues to explore acquisition opportunities to drive growth and is expanding its artificial intelligence capabilities to retain and acquire new customers.
However, Zoom faces challenges in customer retention, particularly in the enterprise segment, where its net dollar expansion rate has declined. Competition from Microsoft Teams is intensifying, posing further obstacles for Zoom.
Conclusion
While Zoom may not be the growth story it was in 2020, its current valuation and strong cash flow position make it an attractive value play in 2024. Despite facing headwinds, Zoom’s potential for growth and its cash-rich operations make it a stock worth considering for value-oriented investors.
Featured Image: Unsplash
Author Faith Yakubu 
