Sell Zoom Now: Buy These 2 Dividend Stocks Instead
Summary
- Zoom recently reported its earnings. On the surface, they look great.
- However, if you go into the details, the outlook is very gloomy.
- ZM is set to increase its revenues by only 6.8% next year and experience a 25% decline in non-GAAP EPS.
- With a forward P/E ratio of 150 times, that's an insanely high valuation.
- If you are long ZM, it's time to dump it now. We will highlight two much better alternatives.
- This idea was discussed in more depth with members of my private investing community, High Dividend Opportunities. Learn More »
As a team of analysts and researchers, we naturally can't help ourselves from observing the hustle and bustle that occurs around us in the markets. One particular stock recently caught our eye: Zoom (NASDAQ:ZM). The product probably doesn't need much introduction. ZM is the leading provider of video conferencing. A tool that was quickly elevated by the COVID-19 pandemic and the associated shutdowns.
If you bought ZM a year ago, congratulations! The run-up it had has been incredible and you are sitting on substantial unrealized gains.
Data by YCharts
It's a useful product that found itself thrust into the spotlight. Like an American Idol contestant, it became all the rage. We've used ZM, and it's a great product. Well, it's a horrible product that forces you to change out of your bathrobe and to see what your co-workers look like at home, something we all could have lived without. But in terms of doing what it's supposed to do, we have no complaints. And certainly, there has been no shortage of sales:
ZM went from $121 million in quarterly revenues in Q1 to $882 million in Q4. A rise that can only be described as meteoric. The chat boards were abuzz with how much ZM beat expectations and how high guidance is for this year.
Zoom Heading Into A Wall
While earnings on the surface look great, here investors have to dig into the details. The guidance in revenue is expected to be between $3.760 billion and $3.780 billion and non-GAAP EPS of $3.59-$3.65. This is up from $2.651 billion in revenue and non-GAAP EPS of $3.34 last year.
But remember, most of that growth occurred in the middle of 2020. ZM saw its quarterly revenues grow from $188 million to $882 million in a year. When we look at where ZM is going from where it is today, and look at growth over the next four quarters compared to Q4 of last year, the growth outlook is much less impressive.
Let's look at what ZM is really saying with its guidance:
Q4 saw $882 million in revenue and non-GAAP EPS was $1.22/share for the quarter. So annualizing those results, that's a run-rate of $3.528 billion in revenue and $4.88 in non-GAAP EPS. This is what ZM would have if they simply matched Q4 numbers with no growth at all.
In other words, from the Q4 base, ZM is expecting revenue to grow by only 6.8% and it expects to work harder for that revenue, actually experiencing a 25% decline in non-GAAP EPS from the current run rate.
This is easier to understand with a chart of ZM's quarterly revenues and sequential growth, quarter to quarter, with the FY 2022 guidance provided by management (note that ZM's fiscal year is a year ahead of the actual calendar date):
Source: ZM SEC filings and author
Growth fell to pre-COVID levels in Q3 and Q4 FY 2021, and the guidance for FY 2022 is flat-line compared to ZM's history. Bulls get excited about the year-over-year comparisons, which will be substantially higher in the first two quarters of this year. But that is because of the growth that occurred late last year. When ZM gets to Q3 and Q4, their year-over-year growth will be substantially diminished.
This shouldn't be a surprise. ZM benefited from having the right product at the right time. While ZM likely would have grown at a solid pace in 2020 without COVID, the meteoric growth was entirely due to COVID-19. Management is telling us that ride is over. The easy cherries have been picked, and any companies that want to use ZM ... already are.
A 6.8% growth rate is probably much closer to what's sustainable. ZM is actually going to struggle later this year and next year to keep its revenue from going down, as many of its customers will reduce their use or will consider other options. ZM has plenty of competitors, and they are into a business with very low barriers to entry.
What does this mean for investors? Well, the easy money has been made and it is best to step off now while you're ahead. What valuation do you put on an interesting tech company that is growing revenues at 5%-10%/year? Certainly not a forward P/E ratio of 150-plus times! These are insane, euphoric valuations that make no sense. We saw these types of extremely high valuations during the "dot-com" bubble, and those stocks that were trading at such expensive valuations saw their shares crash by 70%, 80% and even more.
ZM is clearly a strong sell at these valuations, and given the poor growth going forward. For those who like trading, in fact ZM is a great short candidate.
Off The Rocket, and Into the Money
Many investors are going to stick with ZM. Others are going to "buy the dip" and be adding in the $300s. They will be upset and angry when the price goes into the $200s or even all the way back to the $100s. In denial, they will "buy the dip" and suddenly, they might find that their once very good investment that was up 500%-plus is now a loss.
Just like the gambler at the blackjack table who goes on a lucky streak and believes they can't lose. Doubling down again and again, until their once-large wins become substantial losses.
In the short term, the market is a voting machine. Companies will thrive and become substantially overvalued because they are popular and talking heads on TV are calling them out. We've seen time and again how those very same stocks collapse when reality sets in. In the long term, the market is a weighing machine. ZM will be valued based on its current and potential earnings, which will be a fraction of the price that it's trading at now.
Relaxing Surrounded by Income
As income investors, we don't spend a lot of time speculating in the market. We build our income stream and avoid the day-to-day headaches of prices swinging wildly.
After all, isn't that what retirement is all about? You spent your life in the daily hustle. Running to work, raising kids, juggling bills and generally dealing with a lot of stress. Most of that stress stemmed from the necessity to get a paycheck.
Those who have built up an income portfolio know the joy of kicking back and enjoying the sunset with a beverage of choice. Knowing that our dividend payments are coming in and that our money is doing the hard work for us.
So where can we put our ZM gains to move us one step closer to living the dream and enjoying the sunset?
I've got a couple of great ideas for you. They're treating me and my community of investors and retirees well, so I know they will treat you right too:
Pick # 1: XFLT
The first is XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) which yields 10.1% and pays a monthly distribution. Why do I like it? Well XFLT is comprised of SSLs (senior secured loans) and CLOs (collateralized loan obligations). These combined have helped XFLT spring strongly from its floor last March to new heights. Furthermore, management recently issued new shares, helping to raise their NAV per share.
CLOs provide an avenue to bet on the US's economic recovery. I see the recovery continuing for the foreseeable future, with the catalyst being any successful stimulus packages from the federal government producing faster and stronger results. CLOs and SSLs allow you to have exposure to a wide swath of the US economy while also having strong protections if the companies go bankrupt. SSLs are secured by all the assets of the company, and are first in line when it comes to making a recovery.
Pick #2: PCI
The second is PIMCO Dynamic Credit and Mortgage Income Fund (PCI), yielding 9.4%. Mortgage rates today are near all-time lows. Houses are flying off the market as fast as people can list them. House prices surged 14% in January, even as volume was up over 20%. The market is so hot you might consider selling your house - except for the issue of where will you live? Owning mortgages is a great way to participate in this opportunity while keeping a roof over your head. Such a strong housing market should be excellent news for older mortgages, yet many continue to trade at a discount to par value. The opportunity is in legacy mortgages which PCI invests in.
The Beauty about Dividend Investing
Not only does dividend investing generate regular cash flow needed to supplement one's income needs, but dividend investing is a defensive investment style that generates regular paychecks for investors and tends to outperform when markets are volatile.
The beauty of both XFLT and PCI highlighted above is that they pay monthly distributions as such providing immediate income for investors to route to new opportunities, live on for monthly expenses, or even hoard as cash for their next big trade. Rolling cash from a profitable trade into high yield immediate income opportunities is what makes being an income investor exciting and relaxing all at once. It's exciting to know your income on a monthly basis has risen. And relaxing to know you have now locked in two great new income streams to enjoy. I recognize that many investors have a trading portfolio and a retirement portfolio. For your retirement portfolio, investing in cheap high dividend stocks will help you achieve your goals. At the end of the day, in retirement, we need steady income to live off. Reinvesting those high dividends will further boost your future income, and strengthen your financial position. This is why I love investing in dividend stocks.
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This article was written by
I am a former Investment and Commercial Banker with over 35 years of experience in the field. I have been advising both individuals and institutional clients on high-yield investment strategies since 1991. I am the lead analyst at High Dividend Opportunities, the #1 service on Seeking Alpha for 6 years running.
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In addition to being a former Certified Public Accountant ("CPA") from the State of Arizona (License # 8693-E), I hold a BS Degree from Indiana University, Bloomington, and a Masters degree from Thunderbird School of Global Management (Arizona). I currently serve as a CEO of Aiko Capital Ltd, an investment research company incorporated in the UK. My Research and Articles have been featured on Forbes, Yahoo Finance, TheStreet, Investing.com, ETFdailynews, NASDAQ.Com, FXEmpire, and of course, on Seeking Alpha. Follow me on this page to get alerts whenever I publish new articles.
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Analyst’s Disclosure: I am/we are long XFLT, PCI. 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 (151)
Very well said. Retirees or near retirees like me are just looking for rock solid dependability of dividend income (including continually growing dividends) high enough to sustain the quality of life we desire. If your investments don't provide that at this stage, you should have planned better earlier on. Unless you are set with way more than you need, gambling with speculative investments may well lead to financial disaster at a time you can least afford it.
XFLT currently is at a 13.98% premium to NAV. 3 year average is +.62%
Leverage is 44.78% and Expenses are 4.18%PCI is currently at a 10.29% premium to NAV. Their 3 year average is 2.83%
Leverage is 25.81% and Expenses are 5.18%So both support their dividends by (essentially) borrowing and charging exorbitant fees.Yessir, folks, jump on this author's bandwagon for these hot bargains...the good times will never end! Just look before you leap.
re: "Sell Zoom Now . . . " Well, we'll see if you are correct. Sold Zoom & bought PCI.
I generally don't buy CEFs when they sell at a premium but . . . 9%+ made it tempting!
GLTA
Conceptually I agree but, I have made a few exceptions with individual equities. Not with CEFs though.
thank you. That helps. And does this mean these are relatively safe?
There is no free lunch on Wall Street unless you find a mission to feed the destitute. Note I am not an employee or have ever met, know or have any relationship with HDO except as mentioned above.