r/valueinvesting
Zoom (ZM) is Undervalued
Zoom is undervalued over a 2-year window due to strong cash flow, a $1B buyback, and potential upside from its Anthropic investment.
- Strong cash cow with 60% contractual enterprise revenue and a flawless balance sheet yielding 7-8% FCF.
- $1B disciplined share repurchase program and potential massive GAAP EPS boost if Anthropic goes public.
- Low capex exposure to AI compared to other big tech, as servers are mostly third-party.
- Lacks a strong competitive moat and faces significant competition.
- Market currently prices it as a dying cyclical stock, indicating potential long-term growth stagnation.
- Risks of future net dollar expansion rate dropping and potential capex increases.
Got into Zoom Communications today. I want to preface this by saying that I do not intend to hold onto this long-term. The company doesn't have a strong moat. However, when applying a 2 year window (max), this stock is undervalued.
They have so much competition. But one thing is for certain: they are a cash cow, and realistically, that isn't drastically changing soon. Around 60% of their income is contractual from enterprises. Their balance sheet is almost flawless. There isn't much to complain about here. FCF yield is around 7-8% usually.
Currently, the market is pricing this as a dying cyclical. The numbers show something completely different. At about $82, you are purchasing around 38-40% of their net tangible assets. The remaining $49.50 is the price you're paying for their software, which is still generating a lot of cash. This is unheard of for a tech company.
2 biggest catalysts:
\- A $1B share repurchase program was recently announced. What I love here is how disciplined they are in this area. During their pandemic highs, investors pressured them to buy back shares. Let's just say that would have been a terrible mistake. They purchase when value is there.
\- If Anthropic goes public this year, Zoom could see a massive spike in GAAP EPS and net income thanks to their private investments (what a great headline that would be). Even if this doesn't happen, and growth hits their 4-4.5% target, the share buyback program alone should do a lot of heavy lifting.
Bonus:
\- Their capex isn't expected to skyrocket with AI. Unlike what we're seeing with other large tech companies spending like drunken sailors, or Meta spending $80B+ to create the Metaverse just to see them shelve it. Lots of their servers are third-party. Their current capex is less than $70M.
..
Things to watch for:
\- Ensuring their capex remains low and ensuring they are not spending massive ammounts on servers.
\- Watch for future net dollar expansion drop
\- Ignore short-term drops in "strategic investments" (just noise)
Hard pass video conferencing is basically a commodity now.
And yet this still grow and still make money hand over fist…
Many companies grow and make moeny hand over fist. This is an incredibly competitive market and zoom is not on the radar for institutions or major investors.
I don't see zoom being used much. Most workplaces use Teams
I agree. And their Venture Arm is great. Basically you are investing in a VC fund with stable cash flow support.
reality / quantitative does not matter anymore. only perceptions / sentiments / qualitative attributes do. and in that sense zoom is forgotten - despite being the pioneer.
i often wonder about if we will ever get back to grahams 'voting machine/weighing machine' framework.
not unless we hit a hard recession.
Enterprise is about 60% of revenue and grew 7% last quarter. I'd want to know where that growth is coming from and look at net dollar expansion (how much more or less existing customers spend with them year over year). If it's mostly new customers and cross-sell of Zoom Phone and Contact Center, then the core business isn't doing so well.
No thanks
nothing says undervalued like a thesis to flip it to a greater fool in 2 y
Im just amazed zoom still exists.
Every zoom call I’ve been on has been a laggy mess. Would never invest in it.