After reporting its first quarter 2024 earnings report, shares of Zoom Video Communications Inc. (NASDAQ: ZM) shook markets by initially plummeting as much as 4.6% from their closing price and swiftly rising back to show a 2.5% premium to the day’s end. To put this price action simply, a significant amount of buying orders could have come in as Zoom stock hit its bottom in the after-hours.
While nothing regarding price action can be taken as fact, investors can dig into the quarter's actual results to find a more substantial—more justifiable—basis for considering adding Zoom stock to their watchlists today. As it will soon become apparent, investors should tread carefully around the business services sector and be pickier with their selected stocks.
Compared to peers like Workday Inc. (NASDAQ: WDAY) and Twilio Inc. (NYSE: TWLO), Zoom remains a top choice for Wall Street analysts. It’s got everything to do with the company’s fundamentals. Before investors jump into the details behind Zoom’s results (and future expectations), here’s why the company could still be relevant in the years to come.
A Shift in The Economy
After sending out expansionary readings consecutively monthly since 2020, the ISM services PMI index suddenly turned to the downside, giving markets a surprising contraction reading for April.
Now that the U.S. gross domestic product (GDP) growth rate slowed to 1.6% for the past quarter, investors could be worried that this contraction may become a consistent trend for the sector. However, not all hope is lost.
Because the services sector has been responsible for pushing out most of the economic growth since 2020, as the ISM manufacturing PMI index has been in contraction for the past 15 months, it is unlikely that the Fed will let it go down in flames.
The Fed’s proposed interest rate cuts could aid this sector, allowing cheaper – and more accessible – financing for technology stocks looking to grow. What better way to streamline the new hybrid work environment than to add Zoom’s services?
As one of the top choices in the market, Zoom now holds up to 57% of the video conferencing software market. Because of this wide adoption rate and market penetration, the company made it to the desks of a few Wall Street analysts.
Is there any Upside Left for Zoom Stock?
Those at J.P. Morgan Chase & Co. saw fit to boost Zoom’s price target to $80 a share, directly daring the stock to rally by as much as 25% from its current price.
As bullish and optimistic outlooks are often contagious, analysts at Mizuho Financial followed along with a $90 valuation for Zoom, a bolder stance calling for a 40.4% upside from today’s price. However, Mizuho went even a step further in their view of Zoom.
Over the past quarter, Mizuho doubled its stake in Zoom stock, bringing the bank’s total investment in the company up to $2.4 million today. Considering that the stock trades at 84% of its 52-week high, a bullish bet on top of already bullish momentum must be driven by fundamentals.
A Stellar Start to The Year
Zoom trades at a P/E valuation of 31.3x today, which offers investors a discount of up to 37.6% to Workday’s 50.2x P/E ratio.
Because Twilio has no net profit, investors can use its future earnings expectations, which trade at a forward P/E ratio of 19.6x today. Comparing this valuation to Zoom’s 12.9x forward P/E, investors get another 34% discount on Twilio’s.
Now, taking advantage of these discounts, here’s where investors can lean to get a solid footing. In the first quarter, Zoom generated up to $588.2 million in free cash flow (operating cash flow minus capital expenditures), a 40.6% increase from the previous year.
With this new free cash flow, management immediately looked to deploy up to $2.4 million into buying back stock, crystalizing that the stock seems cheap today even in the face of insiders themselves.
The company’s financials show a gross profit margin of up to 76.3%, which is characteristic of software companies. In this fashion, management has ample room to stay on track for further quarters of positive free cash flow, allowing for more significant shareholder returns.
Over the past 12 months, Zoom generated return on equity (ROE) rates of 5.2%, which grew from 2.5% by the end of 2023. Keeping this expansion rate, Mizuho could be proven right in their bullish bets on Zoom stock.
