Zoom Unleashed a New Product and the Stock May Just Be Getting Started

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Zoom  (ZM) - Get Report shares rose more than 5% by mid-afternoon Thursday on a new product launch, but investors who are skeptical of how much more the stock can run may want to take a look at the way the company is capitalizing on the changing world.

The stock is up more than 680% this year to above $530 a share for a market cap of $150 billion. That’s a move not just about accelerated adoption of at-home and video services, but, according to some analysts, one that reflects that the world is becoming more aware of the increasingly seamless ability to function from home for work and socializing.

Zoom is positioned to see revenue of about $2.4 billion in 2021, according to estimates from FactSet. That’s an almost 300% growth rate year-over-year. The stock trades at more than 60 times enterprise value to sales, more than twice the valuation of many software-as-a-service companies.

Of course, Zoom may have pulled forward some demand from outer years in the valuation. That is a dynamic reflected in many growth tech stocks across different industries, as the Nasdaq 100 is still down 4.5% since September 2.

Zoom shares, on the other hand, have risen since the start of September. On Thursday, the up move was on the back of management’s announcement of a new product: OnZoom. This allows businesses and people to host events, including ticketed events, among other related gatherings. One type of monetization Zoom will pursue will be a revenue-sharing agreement.

But it isn’t just the new product that can make one bullish on Zoom. As Zoom proves itself as one of the most usable and helpful tools for people and businesses, it can up-sell its existing customers. Mizuho analyst Siti Panigrahi wrote in a note out this week that he conservatively estimates that 10% of Zoom’s existing business customers that pay less than $100 a year as a subscription will soon pay more than that amount, as Zoom charges up and businesses stick with the highly productive platform. That, Panigrahi says, would add about $3 billion in the annual revenue stream, making this conservative estimate one that provides explosive upside to revenue.

International expansion across products is also expected to be explosive and Panigrahi notes that only 29% of Zoom’s revenue is overseas, underscoring the lower level of video conferencing adoption outside the U.S.

For the above reasons -- and Zoom is more than profitable -- Panigrahi says a valuation close to 60X Ev-to-sales is justified as a growth-adjusted premium to software-as-service comparables.

And although the risk of a back-to-normal economy stunting adoption of some services is on the minds of investors, the sheer awareness, which has already expanded Zoom’s total available market, may overpower that threat. Businesses and people may still adopt new at-home services because it’s now clear how powerful and convenient they are.

Now, is Zoom fully priced? Panigrahi’s $550 price target doesn’t leave much upside. And the average price target on Wall Street is below $500. Still, with each new year of explosive revenue growth -- and excluding extreme valuation compression -- the stock could still run. Certainly, the fundamentals leave a field of opportunity for Zoom to boost its valuation from here over time. 

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