Few companies have benefited from the coronavirus pandemic more than Zoom Communications (ZM). As millions of workers have traded their daily commute to the office for a stroll to the coffee maker, organizations the world over have become increasingly reliant on digital communication platforms to keep business moving. For readers who haven’t used the platform to converse with colleagues or catch up with long lost relatives, Zoom is a technology company based in San Jose, California that provides a video call and chat software that allows users to communicate digitally with one another. Zoom’s platform offers video, voice, chat, and content sharing capabilities to individual users as well as corporate entities. The company was founded in 2011 by a former Cisco engineer, but since the launch of its flagship software in 2013 it has quickly grown and currently employs over 2,500 individuals. The company received a $1B+ valuation in 2017 and began trading on public markets in 2019.
Following its IPO, shares of Zoom typically fluctuated around their initial offering price in the mid-$60 range until the coronavirus rocked the world economy, shuttered office buildings, and left employees dependent on video conferencing to perform their jobs. As a result, shares of Zoom Video Communications have increased upwards of 700% compared to their IPO Price, and almost 600% since the beginning of 2020.
This light speed growth has everything to do with Zoom’s position as a provider of what has now become an essential ingredient of modern business (video conferencing), and less to do with the company’s resultantly strong financial performance. In cases like Zoom’s, where a company is producing a product that suddenly becomes essential, the market responds by “pricing in” the emergent fact that a company’s products or services have suddenly become essential. This sends share price higher before the company recognizes the financial benefit in the form of increased revenues. However, Zoom has recently posted robust results, recording Year over Year Revenue Growth of over 350% in the most recent quarter. All this growth and the suddenly essential nature of Zoom’s products makes the company a very interesting coronavirus-era case study, as we can see from its Stock Ratings below:
As we would expect to see, Zoom’s outsized revenue growth, its resultant TTM Return on Equity, and the performance of its shares on public markets, have pushed the stock to the upper echelons of EEON’s Growth, Momentum, Scalability, and Profitability Ratings. At the time of writing, Zoom held the #3 spot on EEON’s list of fastest growing securities. However, the stock has truly abysmal Value and Safety Ratings.
Taking a closer look at Zoom’s Value Rating, we see that it has a Price to Sales Ratio of 224.9 and a Price to Book Ratio of 115.0. These are astonishingly high numbers, especially when compared to other technology companies that are thought of as having high valuations, like Microsoft (MSFT), which has a Price to Sales ratio of 11.4 and a Price to Book of 13.8. These sky-high valuation metrics reflect the blinding growth in Zoom’s share price and show how the market can propel a company to a valuation that far outstrips its revenue growth on the belief that its products have suddenly become structurally important.
A similar dynamic is keeping Zoom’s Safety Rating pinned at exactly 1. Zoom currently has a Beta of -0.15, meaning that it trades in the opposite direction as the broader market. In today’s market climate, the market is likely to react positively to news that the coronavirus pandemic is abating, that a vaccine is showing promising results, or other news that indicates a sooner-than-later return to the pre-pandemic status quo. Each of these developments is bad for Zoom, as the company is currently benefitting from the number of companies that have instructed employees to work from home. As the world returns to normal, Zoom is likely to lose customers who return to the office and no longer need to rely on video conferencing so exclusively.
These factors make Zoom a very interesting target for investors at this point in time, albeit a very precarious target. It isn’t often that the way work happens shift fundamentally, and Zoom’s shareholders may very well continue to benefit from this change. On the other hand, most are hoping for life to return to normal – and for Zoom, what goes up might just come down.