Is Zoom Video's Stock Overvalued Or Undervalued?

Zoom Video Communications Inc ZM shares have lagged the S&P 500 in 2021, generating a year-to-date total return loss of -41.4%.

Zoom Video stock has had a wild ride in recent years, but investors may be wondering whether there’s any value in Zoom shares after the recent pullback.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 29.6, nearly double its long-term average of 15.9. Zoom Video’s PE is 73.1, about 2.5 times higher than the S&P 500 average as a whole.

Related Link: Zoom Video Analysts React To Slowing Growth, Valuation Reset After Big Stock Drop

Growth: Looking ahead to the next four quarters, the S&P 500's forward PE ratio looks much more reasonable at just 21.4. Zoom Video’s forward earnings multiple of 50.8 is still more than double the S&P 500’s, making Zoom Video look overvalued.

Zoom Video’s forward PE ratio is also more than double the average multiple of its communication services sector peers, which are averaging a 21.3 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1.0; Zoom Video’s PEG is 5.39, suggesting Zoom Video is still extremely overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.22, well above its long-term average of 1.63. Zoom Video’s PS ratio is 20.14, more than six times the S&P 500 average as a whole. However, Zoom Video's PS ratio is also down 50.3% over the past two years, suggesting the stock is priced at the low end of its historical valuation range.

Finally, Wall Street analysts see value in Zoom Video stock over the next 12 months. The average analyst price target among the 22 analysts covering Zoom Video is $299.50, suggesting 51.9% upside from current levels.

The Verdict: At its current price, Zoom Video stock appears to be overvalued based on a sampling of common fundamental valuation metrics.