Zoom Valuation Reaching 'Washed-Out Levels,' Over 30% Upside Despite M&A Caution

After zooming through the pandemic, Zoom Video Communications ZM stock declined by 15% over the past year, and 13.6% so far this year.

The San Jose, California-based company now trades at forward P/E of 12.56, at a discount to the sector median of 25.4. It is set to report fourth-quarter earnings on Feb. 26 (after market hours), with the Street expecting $1.15 in EPS and $1.11 billion in revenue.

The Zoom Video Analyst: JPMorgan analyst Mark R. Murphy rates the stock Neutral with a price target of $83. This implies an upside of 33.69% from a price of $62.12 a share.

The Zoom Video Thesis: Murphy outlined the market dynamics surrounding Zoom. Zoom’s cloud-based platform has expanded beyond video conferencing to include chat, phone, events, webinars, conference room systems, and contact center services, amassing over 200,000 global enterprise customers.

Murphy highlighted Zoom’s core markets — unified communications, collaboration, telephony, contact center, and webinars—as poised for substantial growth. Projections anticipate these markets reaching $91 billion by 2025, exhibiting an 18% compound annual growth rate (CAGR) based on IDC estimates, up from $34 billion in 2019.

Also Read: Zoom Cuts 150 Jobs, Plans To Hire In Key Areas For 2024 Growth: Report

Zoom experienced meteoric growth during the COVID-19 pandemic. Workers frequently utilized the platform to conduct virtual meetings from their homes. The company’s revenue surged from $600 million in FY20 to over $4 billion in FY22 (January).

However, growth has tempered in the post-pandemic landscape as the company navigates the return-to-work environment.

Despite being a market leader with a history of innovation, Zoom’s stock is currently perceived as undervalued, offering an attractive investment opportunity with a projected upside of over 30%.

“We see ZM shares as having reached clearly washed-out levels on the basis of valuation and share
performance vs. both broad and software-specific indices,” remarked Murphy.

However, caution looms due to potential mergers and acquisitions (M&A).

“The combination of Zoom Video's slow recent growth dynamics coupled with strong cash flow generation and large cash balances, plus the company's own commentary, have been logically interpreted by investors as implying that the possibility of material M&A has risen,” Murphy said. “We think the potential for major M&A is creating uncertainty among investors.”

ZM Price Action: Zoom stock was at $62.12 at the close of trading day on Feb. 22.

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