Three Reasons To Buy Zoom Stock (And One Reason To Avoid It) In 2022
Zoom stock investors have experienced a rollercoaster of emotions over the past two years.
The video-conferencing company’s share price climbed from around $105 at the start of the COVID-19 lockdowns to a peak of $559 per share by October 2020 before beginning a rapid descent back down.
As of May 3, Zoom’s stock price hovers around $103, while its market capitalization stands at approximately $31 billion. To understand whether Zoom stock is a good buy idea in 2022, we must investigate both the positive and negative aspects of the video call company’s investment fundamentals.
Buy reason #1: The financials of the company are strong.
While growth has slowed down compared to peak pandemic levels because of people returning to offices and slightly scaling back on remote work, Zoom still continues to increase sales at a healthy clip.
Trailing twelve months, revenue was $4.1 billion, up 54.63 percent compared to a year earlier. Meanwhile, net income for the period was $1.38 billion, up 104.61 percent. This translated to a net profit margin of 33.55 percent.
Zoom is becoming more profitable as net income growth outpaces revenue growth. While sales for the latest quarter came at $1.07 billion, up 21.4 percent year-on-year, net income was $490 million, growing 88.27 percent year on year. This caused the net profit margin to go up to 45.8 percent. The company has transformed itself from a money-shredder into a money printer.
Buy reason #2: The company is diversifying its revenue mix by expanding into new business lines.
Most of us still associate Zoom’s business with its core video call product offering. And this is not a false impression, as this product still generates much of Zoom’s revenue. But the company is hard at work launching new offerings to leverage existing relationships with enterprise clients by upselling them complementary products.
Zoom Events is probably the most self-explanatory example of how Zoom generates additional revenue by enabling organizations to hold online gatherings with hundreds or thousands of people.
Meanwhile, Zoom Phone is a cloud-based system targeted at enterprise customers that enables employees to hold phone calls from any device, be it a desktop, smartphone, or desktop VoIP phone. Companies seem to be liking the service. In the latest quarter, Zoom Phone added 550,000 paying user licenses. Intuit and Arizona State University are just two examples of enterprise customers that have signed up.
And then there is Zoom Rooms, a software solution that enables companies to turn a physical conference room into a telecommunications powerhouse, where in-office employees can seamlessly converse with remote team members via video on TV screens and high-quality microphones and speakers placed around the room. The pivot to hybrid work seems to be driving a lot of interest in the product: one customer in the Asia Pacific region recently installed the solution in 3,300 conference rooms across its offices, making it the largest single Zoom Rooms contract to date.
Buy reason #3: Established relationships with enterprise customers
Zoom employs hundreds of engineers who build the products and make sure user data is handled securely. But the company also pays homage to its sales force, without whom there would not be any revenue coming in.
Zoom runs a 90-day onboarding program for all new sales managers to imbue new hires with the company values. And Mitch Tarica, Zoom’s Head of Sales for North America, recently told the 20 Minute VC podcast that Zoom wants to hire not just ordinary salespeople but 10x closers who go above and beyond to get the contract.
This success-driven mindset has enabled the San Jose-based software vendor to build relationships with half a million businesses worldwide, including some of the giant corporations in the world. Over 50% of the Fortune 500 companies use Zoom. And the sales team has succeeded in working with a wide range of industries: eight out of the top ten banks, nine out of the top ten hospitals, and 49 out of the top 50 universities in the U.S. are Zoom customers.
Existing customer relationships make it possible to upsell new products. For example, a company that already uses Zoom Meetings might also be interested in Zoom Rooms, Zoom Events, or Zoom Phone. One real-life example of that is Medtronic. In 2020, the medical technology provider began to use Zoom Meetings, Zoom Phone, and Zoom Webinars. Last quarter, it upgraded its contract to include 60,000 Zoom Phone licenses for employees. And air-conditioning manufacturer Carrier Global started with just Zoom Meetings but recently expanded its agreement to deploy Zoom Phone to its 53,000 employees in 180 countries.
Avoid reason #1: Competition is heating up
But while Zoom has established itself as the go-to video meeting software, its core product now faces pressure from the second-most-valuable company in America, Microsoft, which is aggressively pushing its Teams product. And with considerable success: Teams now boasts 270 million monthly active users. For comparison, Zoom, which last revealed its user numbers in 2020, has 300 million monthly active users.
Teams is included in the Microsoft Office software suite, which has over one billion users globally. This is a massive tailwind that Zoom simply doesn’t have. And Microsoft doesn’t plan to leave Zoom alone anywhere. It now offers Teams Rooms and Teams Phone, direct competitors to Zoom Rooms and Zoom Phone.
However, Zoom seems to still come out on top for the time being. According to Google Trends, Zoom receives about 45% more search interest than Teams.
One should also remember that Teams is just one of the hundreds of products that Microsoft sells, which might take away from focus on the product. If Teams went away tomorrow for some reason, Microsoft’s business would remain intact. But for Zoom, the company’s success rests entirely on the Zoom product line. Being dependent on a limited number of revenue sources carries risks, but on the brighter side, it can serve as motivation to outwork and out-innovate competitors.
There is a famous story of how in the 1990s, Zoom founder and CEO Eric Yuan had to apply ten times before he was finally granted a work visa to come to the United States. If Yuan’s grittiness is a model for the entire company, we can rest assured that Zoom will put a solid fight against Microsoft Teams in the years to come.