Once the pandemic’s poster child, Zoom Video Communications (NYSE:ZM) experienced an astronomical rise followed by a swift descent as post-pandemic life unfolded. Down 88% from its 2020 highs, the stock is now in focus due to its attractive valuation, recent earnings beat, and the potential for a comeback in 2024. This analysis delves into whether Zoom is a value buy or a potential trap for investors.
Performance and Valuation
While Zoom outperformed during the pandemic, it has lagged behind the Nasdaq-100 Index and the S&P 500 in 2023. Removed from the NDX, Zoom is now trading at around 7% higher for the year, showing signs of recovery from November lows. Despite the recent underperformance, the stock is attractively priced with a forward P/E ratio of 14.47, below the tech sector median of 24, suggesting it might be undervalued.
Q3 Results and Financials
Zoom faces competition from tech giants like Microsoft, Google, and Cisco, leading to slowed sales growth in the post-COVID era. However, the fiscal Q3 2024 results exceeded expectations, with earnings per share at $1.29 (surpassing $1.08 expected) and revenue reaching $1.14 billion (against an expected $1.12 billion). Operating cash flow also saw a notable increase of 67% to $493.2 million.
2024 Outlook and Analyst Sentiment
Looking forward, Zoom anticipates FY 2024 revenue between $4.56 billion and $4.58 billion, implying 2.5% growth. Adjusted earnings are expected to be between $4.93 and $4.95 per share. Analyst sentiment is mixed, with the majority recommending a “Hold.” However, some bullish analysts project a significant upside, with a Street-high target of $100, implying a nearly 40% rally over the next year.
Potential Risks and Rewards
While the current stock price appears attractive, challenges include heightened competition and slower growth. Zoom’s AI initiatives aim to retain enterprise customers, but uncertainties persist about its competitive edge as video conferencing becomes commoditized. Despite these operational risks, Zoom generates strong cash flow margins, offering a glimmer of hope.
Conclusion
Zoom’s status as a hidden gem or a value trap hinges on investors’ risk tolerance and belief in the company’s ability to navigate challenges. The stock’s potential upside makes it appealing for bargain hunters, provided they brace themselves for potential volatility. Whether Zoom proves to be a hidden gem or a value trap will unfold in the coming months, making it a stock to watch closely for those seeking opportunities in the tech sector.
Featured Image: Unsplash @ Yiyang
