I first wrote about Zoom Video Communications (Nasdaq: ZM) in September 2020.
At the moment, Zoom shares had been buying and selling at $480 and had been already up 700% for the 12 months.
I provided clear recommendation to anybody holding Zoom inventory on that day…
“Promote your shares instantly.”
This was not a case of me not liking Zoom the corporate.
The truth is, I fairly preferred the enterprise. Zoom was rising, had broad revenue margins and generated free money movement.
My drawback with Zoom was that its inventory market valuation was absurdly costly.
I didn’t name the highest for Zoom shares precisely, however I used to be inside three weeks.
Since my suggestion to promote, Zoom shares have dropped to beneath $80. That’s now a staggering decline of 83%.
Truthfully, from the place the inventory was buying and selling, this collapse wasn’t onerous to see coming.
Once I warned readers about Zoom shares in September 2020, the corporate had a inventory market valuation of $138 billion.
At that worth, the corporate was buying and selling at an obscene price-to-earnings ratio of 538 instances.
There was no practical state of affairs the place the corporate might develop sufficient to justify that valuation. However at present, issues look very totally different.
The market is now valuing Zoom at a fraction of the place it beforehand was. Its valuation has dropped from $138 billion all the best way to $17 billion. And the valuation metrics at which the inventory trades even have modified dramatically.
Consensus analyst estimates have Zoom incomes $3.90 per share this 12 months.
With a share value of $75, Zoom shares now sport a price-to-earnings ratio of simply 19 instances.
Unquestionably, Zoom is a significantly better worth now. However at 19 instances earnings, is the inventory undervalued?
I don’t suppose Zoom is dear, however I really feel no purpose to hurry out and purchase shares.
My purpose for saying that is that the corporate’s progress has stalled.
For the corporate’s fiscal quarter that simply ended on October 31, gross sales had been up solely 5% 12 months over 12 months.
Worse nonetheless, administration’s most up-to-date forward-looking steering was disappointing.
Income subsequent 12 months could not develop in any respect and will even decline.
I don’t learn about you, however I don’t wish to pay nearly 20 instances earnings for a corporation that’s not rising.
In the meantime, as I’ve at all times stated, this firm has no protecting moat round its enterprise.
Anybody can arrange a video assembly platform, and the businesses which might be already competing straight with Zoom embody juggernauts like Alphabet (Nasdaq: GOOGL) with Google Meet, Cisco Techniques (Nasdaq: CSCO) with Webex Conferences, and Microsoft (Nasdaq: MSFT) with Microsoft Groups.
These are the form of deep-pocketed monsters that I don’t wish to be going head-to-head with.
With underwhelming future progress, terrifying opponents and a valuation that’s not clearly low cost, Zoom is available in on The Worth Meter as being only a shade overvalued.
There are significantly better alternatives on the market.
Good investing,
Jody
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