Zoom Video Communications (ZM -5.45% ) has undoubtedly attracted the attention of some smart investors over the years. The company was already growing fast before the coronavirus outbreak, but the pandemic put fuel on the fire.
The savvy investors that follow Zoom know these three things about the business: It is a colossal pandemic winner, revenue growth is decelerating, and it earns solid profits and cash flow. Let’s look closer at each aspect in more detail.
Image source: Getty Images.
1. A huge pandemic winner
It’s no surprise that Zoom would be a massive winner during the pandemic. The video-calling software is used to connect people through the internet. When businesses and schools were forced to send workers and students home for remote working and learning, Zoom was an excellent option. Zoom’s revenue soared from $623 million in its fiscal year ending in January 2020 to $4.1 billion in the year ending in January 2022.
In addition to revenue growth, the company added new customers at a blistering pace. As of January, the company boasts 2,725 customers that generate over $100,000 in revenue for Zoom annually. That was up from 1,644 at the same time the year before. That’s impressive considering many businesses started calling employees back to the office.
2. Decelerating revenue growth
Zoom’s explosive revenue growth is decelerating due to economic reopening. In its fiscal year that recently ended in January, revenue growth slowed to 54.6% from 325.8% in the year prior. Of course, a slowdown is to be expected. The world was not going to continue working and learning from home indefinitely. The question that remains is how long and how steep the headwinds from reopening will be for Zoom.
Management has told investors it expects revenue to increase by just 11% in its current fiscal year, 2023. The company has shied away from giving longer-term guidance given the uncertainty around how economies will evolve after the pandemic.
3. Strong cash flow and profitability leading to a pristine balance sheet
Nevertheless, the boom from the pandemic has put Zoom in an excellent position. Profitability and cash flow have soared, and the company has built a robust cash balance. Indeed, operating income went from $6 million in the fiscal year ending January 2019 to $1.1 billion in its fiscal year ending January 2022. That was good enough for an operating profit margin of 25.9%.
Zoom Research and Development Expense (Quarterly) data by YCharts.
As of Jan. 31, 2022, Zoom had $5.4 billion in cash and marketable securities on its balance sheet. That was up from $4.2 billion at the same time the year before. The company is deploying the balance in a few ways; First, it announced a $1 billion stock buyback program. Second, it invests in growth initiatives, increasing research and development spending by nearly double in its most recent quarter.
bonus factor
Zoom price-to-free-cash-flow data by YCharts.
In recent months, shrewd investors are likely also aware of Zoom’s dramatic stock-price crash. The sell-off has the stock at near its lowest valuation ever since becoming a public company. The bargain value presents an excellent opportunity for intelligent investors to buy this outstanding growth stock inexpensively.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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George is Digismak’s reported cum editor with 13 years of experience in Journalism