Time to Reconsider Zoom Video Stock?
When it comes to “stay-at-home” stocks—i.e., stocks that have done well in the pandemic-induced stay-at-home environment over the past year—few have gotten as much attention as Zoom Video Communications Inc (NASDAQ:ZM).
As its name suggests, Zoom is in the video communications business. The company’s main offering, “Zoom Meetings,” provides video, voice, chat, and content-sharing for mobile devices, desktops, laptops, telephones, and conference-room systems. The platform can support thousands of video participants in a single meeting.
The company also offers “Zoom Rooms,” “Zoom Phone,” “Zoom Video Webinars,” “Zoom for Developers,” “Zoom App Marketplace,” and “Zoom Conference Room Connector.”
Based on that description, it’s easy to see why Zoom Video Communications Inc’s business would prosper during the COVID-19 pandemic. When people work from home, meetings are often conducted using Zoom Meetings. And for many students, in-person learning was replaced with online Zoom classes.
Indeed, the company has enjoyed phenomenal growth during this extraordinary time. In the 12-month period ended January 31, 2021 (Zoom Video’s fiscal year 2021), it generated $2.7 billion of total revenue, representing a 326% increase year-over-year. (Source: “Zoom Video Communications Reports Fourth Quarter and Fiscal Year 2021 Financial Results,” Zoom Video Communications Inc, March 1, 2021.)
Its adjusted operating income came in at $983.3 million for fiscal 2021, marking an elevenfold increase from the $88.7 million in the prior fiscal year.
As a matter of fact, Zoom Video Communications Inc was such an obvious pandemic-proof play that its share price didn’t drop much during the market crash in March 2020.
To put that in perspective, most other pandemic-proof stocks—such as consumer staples companies and many tech stocks—did see their share prices tumble during the March 2020 sell-off.
The returns from ZM stock have been astronomical—even by tech-industry standards. At the beginning of 2020, Zoom Video stock opened at $68.80 per share. It then went on an incredible rally and reached a high of $588.84 on October 19. That’s a return of 755.9% in less than a year!
Since the October 2020 peak, though, the momentum in ZM stock has weakened. As the following chart shows, the stock has pared many of its gains after the massive rally. At the time of this writing, Zoom stock is trading at $352.67 apiece.
Zoom Video Communications Inc (NASDAQ:ZM) Stock Chart
Chart courtesy of StockCharts.com
Recent Developments Are Bullish
But don’t cross ZM stock off your watch list. While the company doesn’t seem to be a high-momentum play at the moment, it recently announced a major acquisition. That could change its outlook.
On July 18, Zoom Video said it had agreed to acquire cloud contact center provider Five9 Inc (NASDAQ:FIVN) in an all-stock transaction valued around $14.7 billion. (Source: “Zoom to Acquire Five9,” Zoom Video Communications Inc, July 18, 2021.)
Five9 Inc is a pioneer in the cloud-based contact center business and boasts strong customer engagement. Over the past year, the company achieved 45% enterprise subscription growth and now has 91 customers that each contribute more than $1.0 million in annual recurring revenue. (Source: “Zoom & Five9,” Zoom Video Communications Inc, last accessed July 21, 2021.)
Five9’s blue-chip enterprise customer base includes well-known names like Walgreens Boots Alliance Inc (NASDAQ:WBA), PayPal Holdings Inc (NASDAQ:PYPL), and Coca-Cola Co (NYSE:KO).
Keep in mind that Zoom already has an expansive customer base, as it serves individuals, small businesses, and large enterprises. Its acquisition of Five9 Inc will enhance the company’s presence with enterprise customers and fuel growth by adding the $24.0-billion contact center market.
The deal also presents plenty of cross-selling opportunities to each company’s respective customer bases.
Under the agreement, shareholders of Five9 Inc will receive 0.5533 shares of Class A common stock of Zoom Video Communications Inc for each share of Five9 they own.
The transaction is subject to the approval of Five9’s shareholders, the receipt of regulatory approvals, and other customary closing conditions. The expected closing date is in the first half of 2022.
Don’t forget, while Zoom Video stock hasn’t been a hot commodity recently, its business has been growing rapidly.
In the first quarter of its fiscal 2022, which ended April 30, 2021, the company’s revenue surged by 191% year-over-year to $956.2 million. (Source: “Zoom Reports Financial Results for the First Quarter of Fiscal Year 2022,” Zoom Video Communications Inc, June 1, 2021.)
Meanwhile, its adjusted operating income grew more than sevenfold to $400.9 million.
Put it all together and what we get with Zoom Video Communications Inc is a fast-growing company whose share price is experiencing a pullback.
If the company’s acquisition of Five9 Inc can boost Zoom Video’s business in the way management projects, it might lead more investors to warm up to ZM stock again.