Should you buy Zoom stock?

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Zoom stock analysis. Zoom Video exploded during the pandemic. In 2017, the company reported 61 million dollars in revenue. By 2022 that figure was over 4 billion.

However, growth has been slowing down. This year’s revenue growth is only 7%. More worryingly, net income over the last 12 months has dropped 50% to just under 700 million.

Unsurprisingly, Zoom stock has fallen sharply in response. In 2020, Zoom’s market cap hit 159 billion. That was clearly unsustainable and the 85% drop in share price means the company now has a market cap of 22 billion. With 5.2 billion dollars of cash, the enterprise value is around 17 billion.

That’s a healthy balance sheet but Zoom has now reported 3 disappointing quarters in a row.

Operating expenses in Q3 were up 56% year on year to 765 million. R and D cost doubled to 200 million and sales and marketing increased by 45%. Almost a billion dollars has now gone to stock based compensation over the last 12 months.

Despite the ramp up in operating expenses, gross profit only increased 7% in Q3 and net income was down 85% year over year to just 48 million dollars.

As you can see by the chart, revenue has inched higher over the previous quarters but net income has dropped sharply.

Putting these numbers into perspective, Zoom is now valued at 3.9 times trailing twelve month revenue and 32 times earnings. But if net income doesn’t recover that p/e multiple will only expand.

The Zoom earnings call tried to paint a pretty picture by using adjusted metrics for free cash flow and net income. And the company did report decent churn and net retention. But the truth is the company has been barely profitable over the last two quarters. Zoom has been investing in new features and marketing but the return on that investment is nowhere to be seen.

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