This beaten-down growth stock could rebound and deliver fantastic returns.
Growth stocks have been getting crushed lately, and companies that had seen major positive momentum created by pandemic-related conditions have been particularly hard hit. While it’s reasonable that valuations have shifted as performance tailwinds have lessened and new risk factors have come into focus, there are also promising, innovative companies now trading at absolutely massive discounts compared to their potential and their valuation levels over the last 18 months.
One stock in particular that we will focus on today is down roughly 82% from its high, and it has potential that makes the stock worth pouncing on right now.
Zoom is a growth stock trading in value territory
For a time, Zoom Video Communications ( ZM -6.73% ) was the king of “pandemic stocks.” Social distancing and shelter-in-place conditions pushed a surge of business, education, and personal communication to its platform, and the company’s business grew at an incredible clip. Growth has been coming in slower now that those tailwinds are waning, but Zoom has still put up an impressive performance, and its stock looks attractively valued for long-term investors.
The video conferencing company’s revenue climbed roughly 21% year over year in the fourth quarter, reaching $1.07 billion. Meanwhile, revenue for its 2022 fiscal year (which ended Jan. 31) came in 55% higher annually and hit roughly $4.1 billion. Net income from operations did dip roughly 2% in Q4, but it was still up 61% in the full-year period to reach roughly $1.06 billion. Zoom ended last year with 2,725 customers that had generated more than $100,000 in sales over the trailing-12-month period, representing a 66% increase from its count at the end of the previous year. The company also ended the year with 509,800 business customers that had at least 10 employees, representing 9% growth compared to the end of 2020. Even better, Zoom recorded a net-dollar-expansion rate among business customers with more than 10 employees of 129%, which means that they increased spending on its services by 29% annually on average.
Take advantage of the overly aggressive sell-off
Even as Zoom was posting very strong sales and earnings growth last year, investors sold out of the stock amid signs that pandemic-driven tailwinds were weakening. In that context, it’s not necessarily surprising that shares have continued to lose ground given the performance outlook for this year.
Management’s midpoint guidance calls for roughly 12.1% growth in the first quarter and 10.7% in the current fiscal year. However, the company’s midpoint guidance suggests that earnings are also on track to fall roughly 31% this year.
There’s clearly a substantial sales-growth deceleration underway, and the big earnings contraction would be worrying if there were signs that the business is heading for contraction or that its current valuation was unreasonably stretched. That doesn’t appear to be the case.
Zoom is spending to reach new customers, develop new products and features, and power a transformation that improves its ability to deliver long-term growth. With that in mind, investors shouldn’t sweat the earnings drop-off this year too much. The market may have temporarily fallen out of love with the stock, but there’s still an appealing expansion outlook for its videoconferencing and other communication software offerings, and the sell-offs look dramatically overdone.
Zoom stock is down precipitously from the high that it hit in October 2020, and it currently trades at roughly 21 times last year’s free cash flow and roughly 29.5 times this year’s expected earnings. For a business that has a massive runway for long-term expansion, the stock’s current valuation leaves room for explosive upside.
