Zoom Video Communications (ZM) has been on a tear amid the coronavirus outbreak. Over the past month, Zoom stock has risen 20%, while the S&P 500 has plunged 30%.
The reason for the outperformance? A number of companies have made it mandatory that employees to work from home. This comes at the recommendation of from the World Health Organization which last week declared the coronavirus a pandemic. Since last week the number of companies with employees working from home have surged, including Google (GOOG , GOOGL) which has 119,000 North American employees.
Facebook (FB) and Amazon (AMZN) have asked their global employees globally to work from home provided their jobs enables it. Microsoft (MSFT), Apple (AAPL) and Twitter (TWTR) have followed suit. But it’s not just the major tech giants that’s enacting social distancing, several dozen small companies have also recommended for their employees to work remotely. As such, services like Zoom’s video teleconferencing and collaboration tools that enables remote work are seeing a surge in use and demand. And investors are paying attention.
Zoom shares are now up 58% year to date, while S&P 500 index is down 26%. And despite the stock surging 62% in the past three months, a prominent market analysts believes Zoom stock still has more room to run. Richard Valera, analyst at Needham, issued a Buy rating on Zoom stock with a $140 price target. The stock closed Tuesday at $111.10, meaning there’s still almost 30% potential returns if Valera is correct on his call.
“We think Zoom’s exceptionally easy to use meetings product has both enabled and benefited from a long-term secular shift towards working from home,” Valera writes in a research note. “We think Covid-19 is driving an enduring acceleration of this shift. In the near-term, our checks confirm significant increases in business activity, especially in Covid hotspots, which admittedly could be mitigated by delays in closing larger enterprise deals.”
That’s good news for investors who were late to recognize Zoom’s potential. But has the stock gotten ahead of itself? Bears are quick to point out, Zoom is no bargain trading at 25 times his fiscal 2021 revenue estimate of $1.22 billion. Plus, Zoom’s product competes with those of tech heavyweights such as Cisco’s (CSCO) WebEx and Microsoft’s Skype. There’s also the unknown of how much revenue has the company booked during the coronavirus epidemic and whether it has increased paid users.
During this crisis, the company did a good deed and removed limits on the free use of its video conferencing product. There are also concerns that its gesture of goodwill may not only put pressure on its infrastructure, it can also hurt its profit margins since the company has to build out capacity to support the demand. What we do know is that the company is well-managed, as evidenced by its three-year annual revenue growth of 117%, and the fact that it has a positive free cash flow margin of 18%. What’s more, the company has $855 million of cash and cash equivalents on the balance sheet.
All told, Zoom should continue to thrive throughout 2020 and well beyond the coronavirus epidemic. The virus has forced companies across the world to adjust to non-conventional/remote work styles and Zoom’s best-in-class product offering will continue to enable that shift. The market is realizing that Zoom could be one way to cure an ailing portfolio.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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