Zoom is in the top 5% of my scored watchlist; it checks all the boxes I need to invest in a business.
It has a strong moat in the form of a light network effect from its user base, high switching costs, recurring revenues, cost advantage (from high and increasing operating margins) and brand power (Zoom is now a verb).
It has optionality. Zoom meetings, Zoom Room, Zoom Phones, and lastly, Zoom Apps. Zoom has been innovating fast and growing its revenues for it. Hybrid workplaces will predominate; a present/future in which some employees work remotely while others work on-premise. Zoom's benefit is that it allows hybrid workplaces to avoid the expense of video conferencing (or of leaving their co-workers behind). In October, zoom released the new Zoom Applications platform, which acts as a marketplace for developers to link their apps into Zoom, ranging from whiteboarding and cloud storage services to call transcriptions. For example, DocuSign is integrating its document signature feature within Zoom call. Some developers are even testing videogame integration in Zoom meetings.
It still is a fast grower. Zoom's business success remained strong. Zoom reported $1.05 billion in sales, up 35% year-on-year, with over 2,500 customers paying $100,000 or more, up 94% year-on-year.
It is a financial powerhouse. It has a tremendous and growing return on capital invested. It also prints money faster each year (free cash flow). And it has no debt.
It has proven grit (passion+perseverance). Its founder and CEO owns more than 10% of the company, its mission is dope ("we deliver happiness"), and the company Glassdoor rating is sky-high.
It is at least fairly valued right now. GuruFocus Fair Value models it as "significantly undervalued". Price to Free Cash Flow is at an all-time low of 34. If its P/FCF were to go back at 20 five years from now, which is pretty conservative for a company forecasted to grow sales by 25% 5Y CAGR, it implies an average free cash flow growth of 22%. Today, it is growing at twice that rate. This was calculated with a discount rate of 10% per year (opportunity cost).
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I have been dollar-cost averaging my Zoom position in the past weeks and will keep doing it in the next ones.
The author of this post owns shares of ZM. The Rookie Investor recommends ZM. The Rookie Investor has a disclosure policy. This article by The Rookie Investor is not financial advice as it does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets. Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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