A Deadly Combination As Zoom's stock price has soared, so too has its stock market valuation. At Zoom's current share price, the stock market values the company at $138 billion. To judge whether $138 billion is expensive, compare the cash flow and earnings that the business generates. Last quarter, Zoom generated cash flow of $373 million. On an annual basis, that equates to almost $1.5 billion. That is a lot of cash flow, to be sure - but relative to Zoom's $138 billion market valuation, it really isn't. All of Zoom's valuation metrics look incredibly expensive. It sports a price-to-earnings ratio of 538 and a price-to-cash-flow ratio of 92. These expensive valuation multiples tell us that the market is pricing years of incredible growth into Zoom's future. That is where I get very concerned. I don't see how Zoom's growth won't quickly be shut down by deep-pocketed competition. The big boys are coming after Zoom with videoconferencing offerings of their own. Alphabet's (Nasdaq: GOOGL) Google, Facebook (Nasdaq: FB), Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO) and a host of other companies have all cranked up their focus on videoconferencing. These companies have seen the waves of people and companies flocking to Zoom, and they want a piece of the action. I think they are going to get it. There is really no reason to use Zoom if equal or better videoconferencing alternatives exist - especially if the other offerings are less expensive. How will Zoom fare in a price war with Google or Microsoft? These big competitors have the huge advantage of being able to bundle their videoconferencing software with their other offerings. The only response that Zoom will have is to lower prices - and that will have an immediate impact on the financial performance of the company, which will in turn hit Zoom's stock price. Zoom's lack of a protective moat will eventually be the killer for the stock. The higher the valuation, the bigger a stock's protective moat needs to be. And Zoom's moat simply doesn't justify its current valuation. That means Zoom shares are a risky proposition today. Good investing, Jody |
No comments:
Post a Comment