3 things about Zoom video communications that savvy investors know

Focus on video communications (ZM 5.14% ) has undoubtedly caught the eye of some smart investors over the years. The business was already growing rapidly before the coronavirus outbreak, but the pandemic has added fuel to the fire.

Savvy investors who follow Zoom know these three things about the company: It’s a colossal winner from the pandemic, revenue growth is slowing, and it’s generating strong earnings and cash flow. Let’s take a closer look at each aspect in more detail.

Image source: Getty Images.

1. A big winner from the pandemic

It’s no surprise that Zoom is a huge winner during the pandemic. Video call software is used to connect people through the internet. When businesses and schools were forced to send workers and students home to work and learn remotely, Zoom was a great option. Zoom’s revenue fell from $623 million in its fiscal year ending January 2020 to $4.1 billion in the fiscal year ending January 2022.

In addition to revenue growth, the company added new customers at a blistering pace. As of January, the company had 2,725 customers who generate more than $100,000 in revenue for Zoom per year. That was up from 1,644 in the same period a year earlier. This is impressive considering that many companies have started calling their employees back to the office.

2. Slower revenue growth

Zoom’s explosive revenue growth is slowing due to economic reopening. In its fiscal year that recently ended in January, revenue growth slowed to 54.6% from 325.8% a year earlier. Of course, a slowdown is to be expected. The world was not going to go on working and learning from home indefinitely. The question that remains is how long and how bad the headwinds of reopening will be for Zoom.

Management has told investors it expects revenue to grow only 11% in its current fiscal year, 2023. The company has been reluctant to provide longer-term guidance given the uncertainty about the evolution of economies after the pandemic.

3. Strong cash flow and profitability leading to an impeccable balance sheet

Nonetheless, the pandemic boom has put Zoom in a great position. Profitability and cash flow soared and the company built a strong cash balance. Indeed, operating profit grew from $6 million in the fiscal year ending January 2019 to $1.1 billion in its fiscal year ending January 2022. That was enough for a operating profit margin of 25.9%.

ZM Research and Development Expenditure Table (Quarterly)

Zoom research and development expenses (quarterly) given by Y charts.

As of January 31, 2022, Zoom had $5.4 billion in cash and marketable securities on its balance sheet. That was up from $4.2 billion in the same period a year earlier. The company deploys balance in several ways; first, he announced a billion-dollar share buyback program. Second, it is investing in growth initiatives, increasing its research and development spending by nearly double in its latest quarter.

bonus factor

ZM price to free cash flow chart

Price zoom on free cash flow given by Y charts.

In recent months, savvy investors are likely also aware of Zoom’s dramatic stock price drop. The sale has the stock at its lowest valuation since going public. The market value presents an excellent opportunity for smart investors to buy this outstanding growth stock inexpensively.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging 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 wealthier.

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