Investor sentiment has plummeted lately on fears that rising interest rates could hamper economic growth, in addition to 40-year high inflation and the unpredictable impacts of war between Russia and Ukraine. The technology sector suffered the most, with investors flocking to value-oriented stocks and safer assets amid considerable uncertainty.
Focus on video communications (ZM -4.42%)a company that thrived during the pandemic, thanks to global stay-at-home mandates, fell 64% over a six-month period as part of a broader technology sell-off.
The video conferencing leader posted strong results last year, and while it may face growing pains throughout 2022, the business has a strong growth track going forward. As stocks continue to plunge into a downward spiral, it will pay off in the long run to look past the temporary noise of quality companies today.
Zoom is well positioned financially
Contrary to what its stock market activity may suggest, the world’s leading videoconferencing platform performed well last year. The company reported total revenue of $4.1 billion in fiscal 2022, translating to 55% growth, and adjusted earnings per share climbed 52% to $5.07 .
The expansion of its customer base has also gone smoothly. Last quarter, the number of customers contributing more than $100,000 in annual recurring revenue (ARR) increased 66% year-over-year to 2,725. Ending the year with $1.6 billion adjusted free cash flow dollars, Zoom’s business is proving quite profitable.
Investors should expect some mild growth headwinds in 2022. Analyst forecasts suggest Zoom’s revenue will hit $4.6 billion this fiscal year, up 11%. On the earnings front, Wall Street expects the company to generate net income of $3.53 per share, down 30% from the prior period.
No need to worry, however. The global video conferencing market is expected to register a compound annual growth rate (CAGR) of 16% through 2028, reaching $24.4 billion. Zoom currently dominates the US and UK with a market share north of 50%, confirming that the company is in an advantageous position to support its growth across the board. If the company can maintain 40% of the global market by 2028, it would generate annual sales of $9.8 billion, more than double last year’s figure. Barriers to short-term growth are inevitable for most businesses, which is why it’s important to maintain a long-term investment time horizon.
Zoom looks like a value game
The ongoing pullback has given Zoom a nice valuation. The video conferencing stock is trading at 21.5 times earnings at the time of this writing, about the lowest price-to-earnings multiple it has established since its IPO in 2019.
When looking at the company’s financial performance before COVID, it generated far less profit and less cash flow than it does now. Now that all of the gains made during the pandemic have been wiped out, despite its business improving across the board, Zoom stock appears to be priced cheaply.
Should you buy Zoom now?
Naturally, Zoom has benefited from the COVID-related shutdowns, but that’s not to say the company doesn’t have a bright future. When everyone is falling in love with a fundamentally sound stock, that should serve as a strong buy signal for cautious investors.
Zoom has only strengthened its business since the start of the pandemic, and yet it has been punished by a massive sale of its shares. Long-term investors willing to weather the current volatility and focus on the underlying fundamentals of a business should seriously consider the video conferencing juggernaut today.