Zoom stock (NASDAQ: ZM) is up 6x this year, as the company’s video conferencing software became an indispensable tool for people working and learning from home through Covid-19 and the associated lockdowns. Zoom now has a market cap of over $120 billion and is now valued more richly than technology and consulting behemoth IBM (NYSE: IBM) and aerospace leader Boeing. Is Zoom’s valuation justified? We don’t think it is. The stock now trades at about 170x consensus 2021 EPS and about 50x Revenues. Sure, Zoom has been posting breakneck growth through the pandemic – Revenues were up over 4x year-over-year over the most recent quarter – but it’s not clear that Zoom will be able to sustain its pace.
The physical economy is likely to open up further through 2021, with many developed countries likely to have access to a highly effective Covid-19 vaccine starting from the spring. This could put the brakes on Zoom’s growth. For perspective, per consensus estimates, Zoom’s Revenue is likely to slow to just about 30% over the next fiscal year, compared to levels of close to 300% this fiscal. While 30% growth is more than respectable, at these valuations, we’d expect better. Okta – a SaaS player that offers identity and access management software- is projected to grow at over 30% next year, with the stock trading at about 35x projected Revenues. DocuSign – a company that offers e-signature solutions – trades at about 29x projected Revenue, with growth likely to come in at over 30% next year.
Competition is also mounting for Zoom. Platform titans such as Microsoft (NASDAQ: MSFT) – which is deeply entrenched in the enterprise space and Google’s GOOG parent Alphabet (NASDAQ: GOOG), and Facebook (NASDAQ: FB) could continue to refine their video conferencing services, and offer better integration with their other products reducing Zoom’s growth potential.
See our theme on Work and learn from home stocks for more details on the relative stock price and fundamental performance of major work and learn from home stocks.
[Updated 11/12/2020] What The Vaccine Really Means For WFH Stocks
Work and learn from home stocks have had a solid run this year, as Covid-19 drives demand for connectivity, collaboration, and cybersecurity-related software. For perspective, our indicative theme of Work And Learn From Home Stocks is up by over 190% year-to-date on an equally weighted basis. However, a Coronavirus vaccine is looking like a real possibility in the coming quarters, following the surprisingly strong efficacy data for Pfizer’s PFE vaccine candidate which was released earlier this week. So what does this mean for work from home stocks? While we believe that demand will hold up for these companies in the long-run, investors could re-think valuations in the near-term and more volatility is to be expected. For example, Zoom – one of the biggest beneficiaries of the WFH trend – has dropped 17% since the vaccine news, while DocuSign DOCU is down by about 10%.
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Although it’s likely that a vaccine will become available to the general public by early next year, it could take at least a year or two years for the global population to get vaccinated considering manufacturing and distribution challenges. Moreover, the trend of working from home appears to be here to stay even post the pandemic, as companies look to cut costs, access a larger base of talent, and give employees more flexibility. This should ensure that demand holds up in the long-term. Twitter, for example, has indicated that its employees can permanently work from home, while Facebook expects about half of its workforce to work remotely within the next decade. Additionally, most of these remote collaboration and communication players have business models that are subscription-based, with some level of switching costs involved providing them with some demand visibility.
[Updated 11/2/2020] With Covid Cases Surging, Should You Revisit Work From Home Stocks?
The Covid-19 pandemic has forced people to increasingly work and learn from home, causing surging demand for connectivity, collaboration, and cybersecurity-related software. Our indicative theme on Work And Learn From Home Stocks is up by almost 200% year-to-date, compared to the S&P 500 which is up a mere 1.5%. Although the theme was impacted by the big sell-off in the market over the last week, declining by about -8%, it’s likely to recover quickly considering that Covid-19 cases have been surging in the U.S. in recent weeks, potentially calling for greater restrictions and stay-home orders. Zoom (NASDAQ: ZM) has been the biggest driver of the theme’s returns, rising by almost 580% year-to-date. On the other side, Slack’s (NYSE: WORK) performance has been more muted, rising 14% this year. Below is a bit more about the companies in our theme.
Zoom has emerged as the video conferencing platform of choice through the pandemic, thanks to its easy user interface and simple sign-up process. The stock has gained almost 580% year-to-date although it declined by about -10% over the last 5 trading days.
DocuSign offers e-signature solutions that enable companies to sign and manage contracts and agreements digitally, avoiding a time consuming and inefficient manual process. While the stock has rallied 173% year-to-date, it declined -8% over the last 5 trading days.
CrowdStrike CRWD is a cybersecurity player that offers a cloud-delivered endpoint protection platform, which relies on lightweight software running on the customer’s servers or laptops. The stock is up by 148% this year, although it is down by about -9% over the last 5 trading days.
Okta is a cloud security company that provides identity and access management tools that enable users to securely access cloud-based applications from various devices. The stock has gained about 82% this year and is down by about -4% over the last 5 trading days.
Slack Technologies is best known for its collaboration platform that is positioned as an alternative to email. However, the stock has seen pressure in recent months, as Microsoft’s MSFT rival product Teams has been gaining ground, thanks to its massive customer base. Slack stock is up by about 14% year-to-date and is down by about -11% over the last 5 trading days.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus about 50% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
Source: Forbes – Money