We believe that value investing is centered on identifying stocks trading below their intrinsic value. Benjamin Graham, often regarded as the “father of value investing,” and later on his pupil Warren Buffet emphasized the importance of thorough financial analysis and the need for a safety margin. However, relying solely on this approach can sometimes lead to investments in fundamentally robust companies that, due to market dynamics as described by George Soros’ reflexivity theory, lack momentum. This is further accentuated by charting and price analysis. A prime example is Zoom Video Communications, Inc. At the time of this writing, Zoom represents a quintessential value investment. However, capital parked in it saw limited upward movement for several months, offering no significant returns. This inertia can be attributed to the market’s current disinterest and its bearish trend following the COVID-19 driven rally.
Zoom Video Communications, Inc. (ZM)
Zoom Video Communications, Inc., commonly known as Zoom, revolutionized the telecommunications landscape, especially during the COVID-19 pandemic, by providing a reliable and user-friendly platform for video conferencing and virtual meetings. As of the moment of writing this article, Zoom stands as a potential value investment company. However, its stock has seen a bearish downtrend for the past two years since the post-COVID rallies.
Financial Analysis:
Profitability Metrics:
Gross Profit Margin (TTM): 75.62%; Significantly higher than the sector median, indicating efficient cost management.
EBIT Margin (TTM): 5.59%; The EBIT margin has decreased by 58.40% compared to its 5-year average, suggesting reduced operational profitability.
Net Income Margin (TTM): 3.17%; A significant decrease of 77.37% from its 5-year average, indicating challenges in maintaining profitability.
Levered FCF Margin (TTM): 34.48% An impressive margin, slightly improved from its 5-year average.
Return Metrics:
Return on Common Equity (TTM): 2.18%
Return on Total Capital (TTM): 2.37%
Return on Total Assets (TTM): 1.59%
These metrics suggest modest returns on equity, capital, and assets.
Capital Structure:
Market Cap: $17.84B
Total Debt: $85.69M
Cash: $6.03B
Enterprise Value: $11.90B
Zoom has a robust capital structure with a significant cash reserve compared to its total debt.
Market Performance:
Despite its strong fundamentals, Zoom’s stock has been in a bearish downtrend for the past two years. This trend might be attributed to market sentiments and external factors rather than the company’s intrinsic value.
This presents a potential opportunity for value investors who believe in the company’s long-term prospects. However, as with all investments, it’s crucial to consider both the financial data and market trends when making investment decisions.
This case study provides a snapshot of Zoom’s financial health and market performance, offering insights for potential investors and stakeholders.
Conclusion & Insights:
Zoom showcases strong gross profit margins and cash from operations. While some profitability metrics have declined from their 5-year averages, its capital structure remains solid. The bearish downtrend in its stock price over the past two years indicates a divergence between market sentiment and its fundamentals.
