Shares of Zoom Video Communications (ZM -0.58%) 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 story so far
Zoom's stock soared in the spring as millions of people found themselves stuck at home during the coronavirus lockdowns. Office workers and their employers needed a user-friendly way to run business meetings on ordinary web cameras. Schools started running classes over Zoom. People found the digital experience to be a reasonable replacement for meeting distant family members in person.
Zoom is far from the only video communications game in town, but the platform quickly became the go-to solution. The Zoom service is easier to use than Cisco Systems' (CSCO -0.11%) WebEx, has more features than Alphabet's (GOOG -0.63%) (GOOGL -0.70%) Google Hangouts, and works on a much wider range of devices than Apple's (AAPL -0.96%) FaceTime.
Image source: Getty Images.
It was no surprise to see Zoom shares surging as everyone got used to video calls in the spring of 2020. Zoom's revenues more than quadrupled year over year in September's second-quarter report and again in November's third-quarter update.
It also made sense when Zoom's surging stock started to back down in October. Several coronavirus vaccines made huge steps toward general availability, leading up to final approvals by the Food and Drug Administration in December. Zoom investors saw the potential for continued hypergrowth fade out because there will be lower demand for Zoom calls when life gets back to normal again. Share prices fell by 37% between Oct. 19 and Dec. 28.
What's next?
The company is not resting on its laurels. Zoom is growing like wildfire and also robustly profitable these days:
ZM Revenue (Trailing 12 Month) data by YCharts
Zoom is investing this windfall into a larger range of interesting business ideas. The company is building local offices around the world in an attempt to boost its international sales growth. The research and development budget saw an 80% boost in the third quarter as Zoom explores new services and improved features for the existing Zoom platform. For example, Zoom introduced a web-based set of email and calendar services right before Christmas. With the right features and smart marketing, Zoom could turn this into a robust competitor to established solutions such as Gmail and Outlook.
There's actually no reason to believe that everything will go back to the way it was before the pandemic. Some of the new business tools and policy changes just needed a push to get over the threshold.
"While we all hope for a vaccine as soon as possible, I think that remote work trends are here to stay," CFO Kelly Steckelberg said in November's third-quarter earnings call. "If you think about the significant base of Zoom Meetings customers that we've acquired in Q1, Q2, and Q3, they are there to continue to support our strategy of selling into our installed base, and we absolutely expect that to be a key driver for next year."
Image source: Getty Images.
Should you buy Zoom shares today?
There's no denying that Zoom's stock is costly, even after the vaccine-inspired correction. Shares are changing hands at 56 times trailing sales, 261 times trailing earnings, and 71 times the company's book value right now. Then again, growth investors don't mind paying a premium for companies with a history of skyrocketing sales growth. The big profits can wait -- this is the time to invest every spare penny into growth-boosting business ideas, a rising headcount, a bigger marketing splash, and so on.
Zoom is doing all of that, but the company is already profitable anyway. I wouldn't be surprised to see the bottom line dip back into the red ink in 2021 and beyond as Zoom leans into maximizing its revenue growth while the iron is hot. The stock might run into a couple of significant drops along the way as investors weigh the long-term growth plan against the sudden lack of short-term profits.
With that in mind, I would suggest buying a few Zoom shares today and preparing to buy more if and when the predicted price drops arrive. I could be wrong about the imminent price drops, which is why you want to get started at today's lofty prices. But if I'm right -- and I really do expect Zoom's stock to become cheaper over the next few months -- you'll thank me for the reminder to have some dry powder available.
