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3 Reasons to Buy Zoom Video Communications, and 1 Reason to Sell

Zoom Video Communications (NASDAQ: ZM) has been an impressive growth stock since its initial public offering two years ago. The video conferencing company went public at $36 per share, and it's trading at nearly $360 at the time of this writing -- which gives it a market cap of over $100 billion.

Zoom certainly became a household name during the pandemic, but is the stock still worth buying after its massive post-IPO run? Let's discuss three compelling reasons to buy Zoom -- and one reason to sell it.

1. It's still growing like a weed

Zoom's simple interface, popular brand, and free tier helped it stand out in a crowded market of complicated enterprise-oriented platforms. Zoom was already growing quickly prior to the pandemic -- its revenue rose 88% to $622.7 million in fiscal 2020, which ended in January 2020, and its adjusted net income jumped 513% to $101.3 million.

Image source: Zoom.

In fiscal 2021, its revenue skyrocketed 326% to $2.65 billion as it gained tens of millions of new users throughout the COVID-19 pandemic. Its adjusted net income soared 883% to $995.7 million.

Zoom's growth should decelerate as the pandemic ends and more people return to work and school, but it still expects its revenue to grow 50% to 51% this year as its adjusted earnings rise 37% to 38%.

Those rosy estimates indicate Zoon's growing list of competitors -- which include Cisco Systems' Webex, Alphabet's Google Meet, Microsoft Teams, and Facebook's Messenger Rooms -- aren't gaining much ground in the video conferencing market.

2. The pandemic isn't over yet

Zoom was often called a "pandemic stock" last year because it benefited from remote work and stay-at-home trends. As a result, Zoom's stock pulled back from its all-time high of $588.84 per share, which it hit last October, as vaccination rates rose and more businesses reopened.

Unfortunately, the recent surge in COVID-19 cases across the U.S. and other countries -- which can be attributed to the highly contagious delta variant and stagnant vaccination rates -- suggests the pandemic is far from over. If the pandemic worsens and sparks fresh lockdown measures, Zoom's full-year estimates -- which it provided in early June -- could be far too low.

3. Its ecosystem is expanding

The skeptics might claim Zoom is a one-trick pony without a competitive moat, but it's repeatedly expanded its ecosystem over the past few years. It's added new collaborative features to Zoom Rooms, integrated its services with other enterprise communication platforms, upgraded its security features, launched all-in-one Zoom Phone appliances, and invested in real-time AI-powered translation tools with its recent acquisition of the German start-up Kites.

Image source: Zoom.

Zoom also expanded its App Store, which extends its platform's functionality with third-party apps, and launched Zoom Events for large-scale live events. Its planned $14.7 billion purchase of the cloud contact center provider Five9 could complement all those efforts and accelerate its long-term evolution into a diversified cloud communications giant.

The reason to sell: Its valuation

Zoom's growth rates are impressive, but the stock is undeniably expensive at 77 times forward earnings and about 27 times this year's sales.

But when Zoom closed at $62 per share on its first trading day, the company was valued at nearly $16 billion -- or 26 times the revenue it actually generated in fiscal 2020. Therefore, Zoom isn't much pricier than it was at the time of its IPO, but the stock is now trading nearly 500% higher -- so investors who worried too much about its valuations over the past two years missed out on some massive gains.

That said, Zoom's stock has always been priced for perfection. The pandemic helped it repeatedly beat Wall Street's expectations, and its own rosy guidance suggests it's still firing on all cylinders. But if Zoom fails to clear Wall Street's high bar just once, its stock could plunge. The bears will start growling about a post-pandemic slowdown and competing platforms again, and the bulls will rush toward the exits.

Do Zoom's strengths outweigh its weaknesses?

I was deeply skeptical of Zoom at first, but I recently bought some shares because I believe its strengths outweigh its weaknesses. The stock is certainly expensive, but its simple and streamlined approach to video conferencing has clearly disrupted a dusty and stagnant market.

Zoom isn't letting its core platform languish, as Cisco did with Webex and Microsoft did with Skype, and it has clear plans for its future. If it achieves its planned transformation into a cloud communications platform, it might be worth a lot more in just a few years.

Find out why Zoom Video Communications is one of the 10 best stocks to buy now

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Cisco Systems and Zoom Video Communications. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, Five9, Microsoft, and Zoom Video Communications. The Motley Fool has a disclosure policy.


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