Zoom stock surged 425% in 2020: Can Zoom continue its epic growth in 2021?

30 Dec, 2020 10:37
source: Singularity Financial

Singularity Financial Hong Kong December 30, 2020 – Shares of Zoom Video Communications (NASDAQ:ZM) have been cooling down in recent months. In mid-October, the video conference specialist’s stock peaked at a year-to-date gain of 817%. Today, Zoom’s returns have calmed down to 425%. Is this a good time to invest in Zoom at a bit of a discount?

The Zoom service is easier to use than Cisco Systems’ WebEx, has more features than Alphabet’s Google Hangouts, and works on a much wider range of devices than Apple’s FaceTime. The platform quickly became the go-to solution for school, family and business.

There’s no denying that Zoom’s stock is costly, shares are changing hands at 56 times trailing sales, 261 times trailing earnings, and 71 times the company’s book value right now.

Can Zoom continue its epic growth in 2021?

Ryan Koontz, Rosenblatt Securities Sr. Research Analyst shares his outlook for the stock with Yahoo Finance.

“My concern really is that I view the growth as not as sustainable with, obviously, what they’ve put up has been nothing short of exemplary. And hats off to some incredible execution this year. As we look at the next few years, what is that true growth rate look like? My concern really is that a lot of their sales pushing on 40% of revenues are coming from small business and consumer, which may not be that sticky on the other side of the pandemic.”

“It’s all about the top line, really. I think investors are looking at what that sales multiple is, even the sales ratio. Zoom is trading at a very high premium here, over 30 times next year’s revenues. And so the question is what is that true growth rate look like as we look out in the next couple of years. From an earnings perspective, obviously they’ve done incredibly well. I expect operating margins to come down as the company catches up on opex. They’ve really underspent this year, couldn’t keep up with revenues. And like for example last quarter, they only spent 3% of revenue on R&D and the company expects that to be up closer to 10% going forward.” Ryan added.

There’s been some speculation recently of Zoom getting ready to launch email and calendar services. “I feel like Zoom has to decide who they want to be when they grow up here. Are they going to be the the king of the small business and want to sell an entire solution to the SMB segment? That’s one way to go after it. I don’t think investors will put the same kind of sales multiple on that business, but I think it is an intriguing option. At the enterprise level, I think they have a really hard time displacing the Microsofts and Ciscos and Google’s of the world, really.”

“Over the long term…we start to see some accelerated M&A in this space. And in that case, then I really view the companies that have the most advanced channels to market, particularly the enterprise market as those really holding the keys to success for sustained growth. I like RingCentral, I like Twilio as well, which is a different business model as well in the CPAS space. But both those companies have spent the last five years building out terrific channels to market globally and lots of opportunity for sustained growth, relatively early in their penetration space in the enterprise market.”