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Zoom Video: In A Class Of Its Own

Mar. 10, 2020 11:26 PM ETZoom Video Communications, Inc. (ZM)30 Comments


  • Zoom Video has by far the highest stock valuation in my digital transformation stock universe.
  • The company has exceptional revenue growth and free cash flow margin. It scores a phenomenal 106 on the Rule of 40.
  • The stock price is benefiting from the coronavirus fear but it is unclear whether the crisis is driving new paid users.
  • It is my opinion that the stock price is very overvalued and the stock price may fall once the coronavirus crisis subsides.
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Zoom Video Communications, Inc. (NASDAQ:ZM) is a stock that most investors are drooling over. By all accounts, Zoom Video has a best-in-class video conferencing product. The company's 3-year annual revenue growth is 117%, free cash flow margin is positive at 18% and the company has a significant amount of cash and cash equivalents on the books to the tune of $855 million.

While the company's financials are extremely impressive, I find that the stock price is extremely overvalued based on the forward sales multiple. In addition, the stock price appears to have been inflated during the coronavirus scare as it is one of the few companies that may actually benefit from increased isolation of the population.

Zoom Video has removed limits on the free use of its video conferencing product during this period of crisis. While this action puts pressure on Zoom Video's infrastructure, there is no clear indication that it is resulting in an increase of paid users. The company management has warned that gross margin for the coming months will be negatively impacted as capacity is built up.

Given the very high stock valuation and the likelihood that the stock price will deflate once the fear caused by the coronavirus passes, I am giving Zoom Video a neutral rating. It is unlikely that Zoom Video can sustain this level of revenue growth and stock valuation for the long term. The company has a great product but doesn't have a sustainable economic moat, at least according to Morningstar.

The Rule Of 40

One industry metric that is often used for software companies is the Rule of 40. It is an industry rule of thumb that attempts to help software companies ascertain how to balance growth and profitability. For a further description of the rule and calculation, please refer to one of my

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This article was written by

Steve Auger profile picture

I have been trading stocks, commodities, and options for more than 25 years. I have honed my skills in quantitative analysis and various stock investment tools for 15 years at Portfolio123 and offer services as a consultant in stock portfolios. I also own the financial data service Equity Analytx which provides aggregated fundamentals for a wide range of industries.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (30)

TeleDoc uses Vonage video API's. CEO stated that the company has streamed over a billion minutes of video within the last three months.
There are a few things to consider about Zoom . Yes, Microsoft and Cisco use their own video conferencing software , along with some bigger companies , however , imagine all the small businesses, churchs, legislative meetings, Alcoholics Anonymous meetings , the list goes on . 

Finally , ZMs overall income and revenue will catch up to the share price .
Business is business . Demand is high . Zoom is growing .
oakreed profile picture
Once the Corona virus dust settles, ZM will crater back down to a more reasonable valuation. No company, now matter how disruptive, or growing at lightning speed can sustain valuations or 50X revenues multiple.
Does the $11 per new user account for education pricing? Seems like that might go up a lot with schools using Zoom during the virus
Richard Saintvilus profile picture
I added to my Zoom position this morning. Companies are increasingly mandating employees to work from home. I think Zoom will be one of the beneficiaries of this trend. Their Q1 numbers and guidance will crush even the most-bullish estimates.
Yes, but Zooms userbase is largely small business and schools. Large Fortune 500 Companies such as the one I work at use Microsoft versions bc it comes w the suite of office products that we already pay for.
Can confirm my local university is now using Zoom for lectures. Additionally my Big 4 Accounting firm rolled out zoom firm wide yesterday.
Love ZM, it' far better than TEAM, SKYP, etc.
Where did you get the Next Year Revenue Growth Estimate of 33% for ZM in the chart? That sounds extremely low to me. I believe their last 7 quarters YoY revenue growth was 122%, 127%, 120%, 108%, 103%, 96%, and 85%
In the past I have used Skype and WhatsApp for teleconferencing and sharing documents. Both services have been improving quality and have strong parent companies (Microsoft and Facebook) which should support future expansion and improvement of the service. These services represent strong competition for the ZM platform. I have been unable to identify what ZM brings to the table to warrant 40x sales multiple for its shares.
masondomino profile picture
College Classes
Zoom brings a unique (and superior) architecture to the table. No other product is built like Zoom.
Having used TEAM, Skype, etc and then had a supplier use ZM, I was blown away with the quality, consistency...hmmmmm consistency for Skype/TEAM not so much - did I mention QUALITY. Then there is the Ease of use for ZM...and in a nutshell that's it. Once there is uptake, I believe it will take off and then when you go back to try and use SKYPE/TEAM, it's like going back to school after a fantastic summer vacation...MEH.
EriCoin profile picture
I don't understand why Microsoft is not promoting Skype for conference calls? They were too slow to combat the threat of Slack with TEAMS. I think the same is happening now. By the time they understand & challenge ZOOM with Skype conferencing, ZOOM will be a household name globally.
nathanlane profile picture
The answer is the cloud.
Skype is not fit for business use and Skype for Business is being sunset. They are moving people to Teams. So, they are unlikely to promote Skype or Skype for Business against anything at this time.
Well, they have an uptime, quality, and basic functionality and design problem. TEAM is slightly better in some ways and worse in others.
11 Mar. 2020
And what about zoom phone. That could be a very promising product
Can't wait for that and just hope they don't sell for years to come so that the biggies with worse plats don't destroy it.
Correlation is not causation and you made a weak one at that. ZM has been moving well before CoViD when it was in the $60s. The current epidemic merely highlights why ZM’s time has come; another year will bring another menace and now we have issues with planes falling from the sky so why not make your keyboard fingers do the flying? Valuation very high but there are solid fundamentals underlying.
everyone seems to be downplaying zoom. they have government user and once the government uses a system they are reluctant to change. zoom is a $150 stock at worst. free cash flow and international growth. will push price higher. if zoom takes on new users on a free app, and the users love the service, why would they not switch to the payed version?
EriCoin profile picture
from who, Microsoft or cisco? think acquisition.
EriCoin profile picture
nice article. agree with your thesis c-v is boosting the sp. who knows if this is the wave of the future ('social distancing' in all its' forms). i looked at zm and tdoc, and felt tdoc was a little stickier simply by being in the medical field.
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