Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Valuation and competition pose a threat to Zoom's soaring share price
City analysts remain split over cloud-based video calls business Zoom Video Communications after the stock’s stunning 273% surge this year.
Millions of people globally have used its platform to stay in touch with family and friends during lockdown. Users must to pay to hold a meeting that lasts for more than 40 minutes and Zoom now has more than 265,000 paying business customers with 10 or more employees.
Zoom’s share price has more than doubled since the coronavirus emerged as a serious global threat in mid-March, having floated on the stock market in the US at $36 a share in April 2019.
The surge appeared to run out of steam by early June before rallying again in response to first quarter figures, when Zoom reported strong growth and more customers than expected paying for its full service.
First quarter revenues of $328m were considerably ahead of $203m forecast. That saw the stock price hit a record $239.02, prompting many analysts to question the stock’s heady valuation.
‘The big question as always is the valuation of this business and this is where I run into difficulty,’ says Richard Windsor from research group Radio Free Mobile. ‘I think that Zoom has executed well against the challenges that it has faced during the pandemic and as such, it has carved itself out a space in this market.’
Yet the analyst notes the hefty multiple at which Zoom shares are trading, calculating a 2020 price-to-earnings (PE) multiple of 179. ‘Even if the company grows earnings 100% in 2021 and 100% again in 2022, the company will still be trading on a 2022 PE of 45-times,’ he adds.
Other analysts are more positive. ‘Easy to deploy, use, manage and solid scalability make Zoom Video’s software more popular among its customers,’ says US broker Zacks. It also adds that the company’s expanding international presence is a key catalyst for the share price even from current record highs.
However, heightened competition is a problem and that means video conferencing providers are being forced to differentiate their services to stand out from the crowd.
For example, Zoom says it will provide end-to-end encryption for paying users, while Microsoft Teams has unlimited call time for free and will soon expand its gallery view to fit up to 49 people on the screen.
Google has now made its video conferencing service free to use. Facebook has a video-calling feature called Messenger Rooms and WhatsApp has expanded its video conferencing facility so up to eight people at a time can now chat together. This level of competition is ultimately a serious threat to Zoom’s ability to sustain rapid levels of growth.